 This is State Tech Hawaii. Community matters here. Good afternoon. My name is Ray Tsuchiyama for another great, great interview show named Business in Hawaii. And our topic today is real estate, or more specifically, commercial and industrial real estate. We have a guest who is going to be really discussing how real estate is reflective of the overall economy and how the overall economy affects real estate. And Hawaii is unique in many ways regarding real estate compared to other markets in the mainland, like Las Vegas or Phoenix or Los Angeles. Here in our post, a string of eight islands in the middle of the Pacific. And we have today Mark Ambard of Ambard & Company, his principal and has been independent in this area of commercial and industrial real estate since the mid-1990s. Welcome to the show, Mark. Thank you, Ray. Nice to be here. Nice to be with you. We've known each other a long time. That's right. The reason why I chose Mark for today's show is that in my previous career in commercial real estate, he worked at the same office. And today, why don't we start with the state of real estate, commercial and industrial in Hawaii in 2018. What's about it that makes it unique? And tell us how you see it. Okay. Mark is strong. Okay. It's also probably a good time to buy commercial real estate. You've heard about stocks, I'd rather buy a great stock at a good price than a good stock at a great price. Same with real estate. A great property will appreciate. A great property will generate income. This is a good time. And how about the tenants out there? Is it a time that they find difficulty finding inventory for their own businesses to put their items in storage or to operate their own business? How is it for tenants? Well, tenants don't own real estate. It's a good time to own real estate. We have a constrained land situation. We don't build as much as maybe we need. We don't develop maybe as much as we would like, but we also don't want to give up the beautiful land features and the parts that we love about Hawaii. So what's the occupancy rate in commercial real estate and industrial real estate? It's high. We're probably 94 to 95 percent in warehouses. I hear the office market is slacking off a little bit. I don't deal with it a lot. I know that you were talking about how difficult it is for tenants. Finding places is the most difficult part for tenants. And if you were a tenant, or if you're going to tell a tenant advice about finding a place and the constraints or the framework or the pricing, what would you tell them? This is going to sound self-serving. I'd say find a good realtor in your market. If you're looking for a restaurant, find someone who's done restaurants and a number of them. Just as when you have a surgery, you might say, have you done a few of these surgeries, doctor? Of course. If you've operated on a foot and he says, I've done 10,000 feet, you might feel confident. If you're looking for a restaurant, find a restaurant expert. If you're looking for a warehouse, find a warehouse expert. Offices, it is not hard to find someone who's an expert in offices. Common sense. But what I'm trying to say is don't do it on your own. This market is so tight, you just could not absorb the information, the relationships and the knowledge with people in order to bring a deal together. Maybe there's two or three people for every vacancy, but here's the caveat. Commercial real estate is not so much who going in like in a house, everyone needs a house. A couple of bathrooms, a bedroom, a kitchen, you're good. One guy needs a restaurant, another guy needs a distribution center, another guy needs a hospital. So even though I may have 500 warehouses available for small distributors, if I've got a restaurant guy looking, I have no vacancy. Even though the vacancy rates high, that's what makes it so difficult because we don't develop enough, rapidly enough in this community to have extra inventory available for these people. Like we were discussing before, we are unique in that we're inventory constrained. We don't have to land outside of Phoenix or LA or Dallas or Utah, your favorite place. My daughter lives there. It's really hard to build tomorrow to bring in inventory. So you've been in the business since the mid-80s, and you've seen inventory out there, but there are times in the past when there were crises that there was a recession that affected commercial real estate, and of course people had to downsize or move out and so forth. Can you tell me the first one that hit and kind of some lessons that you got out of that? One of the early ones I remember, well, was the dot-com, that was in 2000. There was also one in the early 80s, but I don't know what we called it. It was just another one of the many recessions. But the difference between that one, dot-com, and the 2008 or 2007 housing crisis was that our economy is healthy right now. We weren't healthy. We were losing lift. The ATA had gone out of business in the case of the 2008. We weren't growing. People were, you'd see in the news fewer people coming in this and that. We don't have that right now. We're moving on all cylinders. I heard last night that timeshares, which have sort of been like the ugly stepchild of the real estate business, even though they're cheap and people love them, timeshares have a 94% occupancy in Hawaii right now, which is ahead of our normal, supposedly 84, which is everything I heard this morning from Howard on the morning news. Now, with the insights you've got, then you don't see anything in the horizon or kind of signs that there are something bad in the horizon going to happen. There's always exigent circumstances. First of all, let's look at the slow, steady concern I have interest rates. If we continue growing and being healthy and have a booming economy, interest rates are likely to move up. I actually remember 18% rates under Paul Volcker when I was in my 20s. Well, in the early 80s on the corner, the late 70s, early 80s, Carter Reagan, it was close over 14, 15%. Exactly. So interest rates can move up. We've been in this low rate world for so long, we've kind of gotten used to it. And I'm a little worried about that. As interest rates go up, they put pressure on prices to come down because a commercial real estate project is generally valued based on what it earns. And we take a lot of stuff and we come up to the gross income. And then we come to the net income, the amount that the owner of the property can put in his pocket, either to pay his mortgage or to pay his xy's or whatever. You got the money in his wallet to pay. So that net operating income was multiplied against a rate of return. We call that the capitalization rate. Right now, we're using about 5.5%. It seems to have pressure upwards. I see 5.3 quarter and 6 in the next year. That will put pressure on prices downwards. On the other hand, we have so little inventory, there's always pressure upwards as long as the business is coming in and the pressure is there to fill the empty spaces. So you see an external world of interest rates, but at the same time, we seem to be unique with our own market. Oh, absolutely. We are unique in that we sort of generate our own value in business and everything else. But should tourism drop off? A terrorist act. We lose a plane over the Pacific. A hurricane hits us and hits us hard. That's right. All of these things could be horrible situations for property. And we're not a diversified economy. We're more reliant on tourism than in the 1980s. We were on a three-legged stool, which meant agriculture, military and tourism. Now, agriculture is gone, military is steady, but tourism has really taken over to maybe 60%, 70%, and the rest of services of the economy. So you're correct that we should be worried, but everything is going on six cylinders, so we're really not. How worried do you want to get about what you don't know? It depends on the type of person you are. I imagine the person that's really worried about hurricanes and the like would maybe not own property. They might keep their assets in something that is away from any natural disaster. It's like gold. Gold, stock, anything like that, absolutely. Not tangible real estate. Real estate owners tend to be hands-on. They like being able to touch the asset, like gold. But the situation is maybe an industrial property made out of concrete is more to someone's liking than a residential or a multifamily property high in a hill that could be affected by the wind. But again, when you talk about commercial real estate for investors, there has to be, like you say, a rate of return. There's income and so forth. And you can get a loan on that. And basically, looking at the future, so you get monthly payments. And you have that income that you can invest and put in a bank and so forth. So that's what commercial real estate is all about. But at the same time, if the tenant can't pay the rent, then you have real problems. This is where the market tells you what's going on. If you have a vacancy and it's vacant longer than you care for it to be vacant, you will lower your price or improve your property. My experience in Oahu properties, to be honest, the landlords don't really take care of them. It's a cash cow. The money comes in any way. They really don't have to attract tenants. The biggest problem I have when I'm moving into a tenant is the condition of the property to move them into. Of course, for the tenant for a point of view. They'd almost always be willing to pay the price. But the property just doesn't look like it deserves it. And that's always a bit of a problem. Not all of them, but we don't have much new inventory. What happens as your broker, you're trying to make a good deal for both the tenant and the owner. But a tenant sees a place that really needs work. What happens? Well, it becomes part of a negotiation how badly the tenant wants it. If enough tenants pass that property by, then the owner will get the message that he's either gotta lower the price to attract his tenants or do something else to attract the tenants. A building with the known bad roof, a leaky roof. Everyone knows it's got a leaky roof or even worse, there's asbestos underneath some floor tiles. And it's known, it's in the thing and it's all sealed up, but makes people crazy to know it's there. Those issues have to be dealt with. Some people won't even consider the property. How badly does the person want to get in business? How perfectly does this property suit them in other reasons? For instance, location is still absolutely critical. So if the location's good and the price is sort of acceptable and it's not in terrible shape and you can get the owner maybe to fix the roof, that is how we're doing it. But we don't have a big problem. I was fortunate enough to put three properties in the market in the last 10 days, total of about 12 and a half million dollars. They all had multiple offers and they all went in escrow. I think the last one in escrow this morning. They were five and a half capped on legitimate income that was projected but agreed upon by all parties. I think the sellers did well. I think the buyers probably did well too. You never know until everything moves on. I think our economy is going to grow and I think because of that, anything you buy now. So we'll come back to that on the uniqueness of the Hawaii market after we take this break. This is Think Tech Hawaii, raising public awareness. Truth is I'm impressed. I haven't been asked such intelligent questions in a long time. Thanks. Watch my show on Tuesdays at one called Out of the Comfort Zone. I sang this song to you because I think you either are cool or have the potential to be seriously cool and I want you to come watch my show where I bring in experts who talk all about easy strategies to be healthier, happier, build better relationships and make your life a success. So come sit with the cool kids at Out of the Comfort Zone on Tuesdays at one. We are back for business in Hawaii, the second half of our show, really describing the state of commercial and industrial real estate in Hawaii with our guest Mark Ambard, who is the principal of his own independent company and he's been in business for a long time and we've been together a long time ago and kind of going into the future right now and which is that if we were going to ask Mark to hypothetically project ourselves out, this is the year 2018 and if we see the year 2020 or in slightly around that time and there's something bad happens to the economy, something that really affects how people will do business and the economy. What should landlords be preparing to do to preserve their investment so that really it retains value and is an asset? What would that be? Always a difficult question to advise landlords to prepare for the worst when they're experiencing the best. Yes, why would you even think of that? Exactly, exactly. And the first thing for them to do is do a financial plan with their lawyer and their accountant and find out when is an optimum time for them to be selling a property. If they should hold for 10 years or more, they'll probably go right through any difficult situation. They're getting rents. The rents really aren't gonna change. Yeah, they could go down a little bit but they'll probably be all right. I'll get to that. They're in for the long run. I'll get to the rent stabilization a minute. But I think as far as talking about it, but if they are looking at some kind of planning, a medical situation, a family situation and the time is to sell the next two to three years, they've gotta decide if they wanna do that. Now as we get closer to the two or the three years out, we'll know if we're... Of course, yeah. Everybody's worried about what's going on with the last 10 years of growth, right? So we say find out what you need to do so you're prepared to do it. Exactly. Step one, be able to go cry. Now if you have a five-year window. You have a plan. Yeah, if you have a five-year window, well, we might have something happening in five years. I couldn't really, you know, and across 10 years, we definitely will. Now, with regard to weathering the storm, start now, you have an opportunity in a strong market as your, over the next two to three years, most people will have a lease transition over two to three years. Most leases are three to five years. Over the next three years, a number of them will renegotiate. Now is the time... So we're looking forward to a critical time when there's a lot of leases come up. Well, you know what's going on with yours but the point I'm making is there's a lot of people right now it's a strong market. If you have a lease come up and you're gonna renegotiate, make sure your tenant is strong. Don't just go for top dollar. I've noticed a weak tenant or a tenant who's nervous will agree to any number you want to go into a lease to get the lease because once they're in, it's hard to move them out. People that come in and say, I'll pay anything I want to, gotta be in tomorrow. And how does the landlord investigate that? And check this tenant out. If this tenant is really strong financially, economically and business-wise, you know. It's tough. You've got to do your research. Interesting story today we had someone call us today about one of the properties that we have in escrow. And we were determining whether we were gonna meet them and show them property. And my partner said, I'm not so sure. So I just looked at the guy's email address and typed in the domain and went to what the company was but we'd never heard of it. It's a huge company. It's someone very interesting could come to Hawaii. It's a very exciting situation. So that's one of the things we want to do. Financial strength, what tenant will weather bad times? If the economy dips a bit, who's gonna stay? That's right. Are the contractors gonna stay? Are the distributors gonna stay? What type of client? What type of client? What kind of business they're in? The category. That would weather the storm the most effectively. And the way to do that is you can look back at who stayed in business over the last 15, 20 years. Good point. So you look back at a recession period and say, who were the survivors of that and did well and sustained themselves to today? And many owners don't do that. Some of the institutional owners and developers, they have teams that do that. Most of them rely on the brokerage firms to give them this kind of advice and we rely on the research firms to give us the advice and the people we talk to and work it around. The basic issue is strengthening your situation. We have probably two to three years of good times ahead. That's my best opinion. Barring an exigent circumstance. I mean, January 13th, we thought we were gonna get blown up by a missile from North Korea. So I mean, talk about your bizarre exigent circumstances. We get all kinds of stuff here. Hawaii, strengthen your income base. Quality tenants, good rents. And you can push your rents now, build your cushions, have your, because money's coming in, you're building in good condition so that if you do need to re-rent, it's attractive. Okay, so that's another good point that they shouldn't just let the building deteriorate but they should really improve it over time. So they'll be ready for a better tenant in the future. Is that what you're saying? Yeah. We tend to get lazy in Hawaii because it's such a good market. We can get a tenant and we don't really have to put lipstick on our buildings to attract the tenant. I'm industrial, commercial industrial realtor and investment realtor predominantly. So I don't see the pretty stuff. I don't get to go to the new stores that I don't want to center, the nice new offices. But there's so many people out there, businesses who want those storage or industrial. Absolutely, and I've got to take them. I mean, I spent the last 15 years selling caves. And it worked. We made a ton of money for the developer. But the fact of the matter is, a lot of these properties are allowed to deteriorate. The roofs, the painting, it's just they have a tenant, they're getting their money. Why put the money in it? No one's got a problem until the tenant leaves. And I bring a new tenant up to the building and I say, we'd like $1.25 a square foot for this warehouse, Mr. Whoever. And he looks and he goes, you know what? Obviously the roof leaks here. I can tell that. Obviously the door's broken. Obviously the concrete's cracked. And that a 100% place for their business. It just puts the situation of negotiation. And my job is to try to get both parties to understand what their value is and then try to find a point where they meet, who fixes what, who gets free rent. If I happen to put a concrete contractor into a building that needs concrete work, well, that's a simple one. That works very well. Yeah, they can take care of themselves. Indeed. Well, that's a very simple answer, but yet very complex because a lot of landlords, like you say, are really putting the money in the bank or spending it for their own purposes other than improving their properties. Nothing necessarily wrong with that. And in a triple net lease, the tenant is responsible for certain levels of maintenance. But because we also have ground leases where the building owner is responsible for every, I mean, the landowner does nothing, the building owner is responsible for everything, we get confused sometimes. In a triple net lease, it does have management, maintenance, and insurance requirements paid for by the tenant monthly. We don't know if the owner really is doing that sinking fund for the roof that's gonna be needed in 12 years. They may be very wealthy and able to do it. Things get pushed often, you know. Too far down the line. More than they need to be. Nice to see little maintenance go along, but in all honesty, we've had hard and easy times. And sometimes we just, during the easy times, we wanna pocket the money and enjoy our lives. Can't blame these people. So the market for tenants really, really tough right now. Yeah, it is tough. Not only finding what you want and the size you want, but in the location you want and at a price that you can even hope to pencil out in your business. It is a difficult time to start a small business in Hawaii. Now if it's tough for local companies, people from here trying to grow in Hawaii, it must be really tough for companies coming in from the mainland or Japan or wherever to build a new business in Hawaii. It would depend on their capitalization. Some of them come in here not with the intent of getting a profit, but in the intent of having a connection to Hawaii in order to generate profits back home. So often time the offshore players have a different reason for doing what they're doing. And they pay more. They not necessarily will pay more, but they're so much stronger financially they get looked at. You know, it's hard to tell a landlord, here's a nice local player starting up a business a cute business going to be great. Here's a small subsidiary of a $20 billion, you know. I'll take that one. Which one would you like signing your lease? It's obvious and that makes it all the more difficult for this player to work in Hawaii. From the landlord point of view perspective. You're absolutely right. It's a no brainer, but that makes it even more challenging for the local business entrepreneur. Now I have been a landlord's representative agent for many, many years. I've represented thousands of tenants, okay. Whether I independently or in dual agency or something like that. But the landlords still have the control even when the times are tough because they're just, when times are tough there's fewer tenants, they're not coming in and they're almost begging to get a space because they're not, their financial sheets don't look that good. You get a good strong, well, perfect examples when times are bad. Who comes in and scoops up all the properties? Those all cash buyers, they come in this or get them all. Same concept with leasing, the strong survive. It's good, it's bad, it's tough to be a tenant. Even though it's a very difficult time that you recommend for tenants to be very strong financially. Well obviously, be strong financially or have a good story. If you can convince, I've had many times where a tenant who shouldn't have gone to the building. I've just kind of dug them and I liked their story and what they were gonna do. And I was able to give that enthusiasm to a landlord who maybe I've known a long time and trust me. And maybe a chance is taken, that goes back. You become the voice of the tenant. You become an advocate for the tenant. You're definitely the only way the landlord knows who the tenant is is through the broker. He doesn't meet the tenant until a long after. But to bring the circle closed, it's the advocacy for the tenant and then bringing the tenant in that the broker brings to the relationship I said earlier. What would someone do? Give me an example of such a player who had a very compelling story. There was an embroidery company. They did embroider on sports equipment, sports stuff. Your coach says coach Ray and they did this. And they'd been working out of a garage for 15 or 20 years, 10, 15 years. Local family, I, because my kids were in soccer and baseball and everything else, had spent a ton of money with these people getting this stuff and picking it up in the garage. I'm working at a outlying mall, actually a stadium mall with ice palaces. I'll give credit where credit's due. They came in and they had a reputation that I knew and all the kids and the location was perfect because every sports kid in the island could come into IAEA right there where the ice palaces, plus every kid in Hawaii knows where the ice palaces is. And we had this empty store, had been empty a while. Now we're talking late 80s, early 90s on this one. So we're going back on this. I talked to the lady, she was really nice. I'd worked with her. She had equipment in her garage. She'd moved this stuff. The size was about right. Her numbers were good and I was in. I just love a small company when you think about it. Yeah, it's a little bit of anyone. It's a one-person show, you know? If they've been doing 100 grand a year. And I went to the owner who is very Doug Taylor, very local player, very good man, and just said I think these people will work. And he kind of listened to the story and he's also able to make his own judgments. He's been leasing his own, he built that place himself. There's stories of him smoothing the ice the first time by standing on a four by eight with a metal blade on it being dragged by an old Chevy across the ice. So I mean, it goes all the way back to the solar powered monster he has now. But he took a chance, they're still there. Wow, that was a great story. And the people love him and know where they are. And it is needed to get that location. So that's the kind of thing that happened. It worked out for everybody and for the children of Hawaii. They had an outlet right there at the ice. Easier for the parents, don't have to go to this house in Pearl City. You know, no one wants to go to someone's garage and Saturday night and do that. And they open the garage, they have 7,000 hats. Great, but nice to go ice palace. But again, that's reflective of how brokers play a role in the economy. And you mentioned what wants to be a broker's broker. What does that mean? Brokers are suspicious of each other. It says competition is all kinds of things going on. And certain brokers can't, like some of the big companies can't hire each other. When I left the company we were at, there was work that needed to be done with the principles. Two of the principles owned a property and Kalihi and needed work done. And it was legal type stuff. It involved the tenants and this and that, all kinds of crazy stuff for the leasehold. They needed a broker to come in and market it, but they needed a broker to represent other brokers. And I was good for that because I had enough of a reputation of doing good job, but I was an independent. I literally was no competition of any sort to the bigger company. They could tell me their secrets, they could fill me in on what I needed to know, knowing there's no- Yeah, you don't represent a huge organization. And they know that I wasn't inclined to do that. I mean, the principle that I worked for knew when I left that I was going to be a single show for 30 years as I still am. And that was the reason they felt that. Plus, I guess they knew my skills. So you help out the broker community, the larger ones at least. Yeah, I've been called, there's a couple of broker trends that called me in, for some of the expertise I have, but frankly, I'm getting along in the tooth. That expertise has been told. Maybe a little wisdom remains, but some of these- We have a lot of background, a lot of details. Some young guys out there that just amaze me. Oh my goodness. I'm working with one, he's just get a chance to work with one. Maybe we should have those people in the future to kind of hear their stories, but we're at the end of our show. Oh, great, went quick. Well, I told you it's a quick show. It really was, I was somewhat concerned. And I'd like to thank Mark for his insights. I think it's a valuable kind of show for landlords and tenants, and for business to really develop and grow and become successes in Hawaii. Thank you so much. This is Ray Tuchiyama.