 All right, it's Friday, 10 o'clock spot, I'm Jay Feidell, this is Think Tech, and the guy next to me is downtown Jamie Brown, commercial real estate, the king of commercial real estate. How downtown, Jamie Brown, how are you? Good morning, I'm doing great, thanks Jay. So it's not only that you have dedicated your life, your professional life to commercial real estate, your son is doing that too, talk about it. My son, Kimo, is a junior at USC, and he interned last year at Douglas Emmett Group, big owner in Hawaii, but he was in Santa Monica, and they own a lot of real estate in Southern California, and this summer he's going to be interning at East Hill Secured, which is kind of the apex predator in the commercial real estate world. So I've got him fooled too, he thinks it's a great profession. Well, the question is whether you're going to teach him or he's going to teach you. Hopefully the latter. So Jamie, let's talk about the market, you know, what provoked this show is you distributed your report about the office market downtown, and I'm really interested to hear you roll that out for our viewers. Okay, well, the exciting thing about the report is our office market has been stagnant for like 20 years, rents or base rents have been pretty static for 20 years, the rent you paid in 2000 is about the rent you're paying now. You're starting to scare me, Jamie. However, there's three things that are occurring in 2019 that could change all that. Okay, let's talk about them. So, but do you want to talk about the why or the, well, so the reason the market is stagnant is the vacancy slide. So if you look at the vacancies through the markets on Oahu, you'll notice the highest vacancies are the left to airport and the CBD, which stands for central business district and really focus on the central business district. It stands out. It's got the most inventory, the most vacancy, a lot of vacant space downtown. That's what central business district is. And in the world of commercial real estate, it responds to supply and demand. If you've got a lot of vacancy and not a lot of demand, guess what? Rent goes down. Rent goes down. Let's go back to that shot so we can understand and unpack that shot. Now these bars are by area. Am I right? That's right. So we're looking at different areas and the high one, like the one next to the left, the one next to the left, that's really high. What area is that? So that's the CBD, which stands for central business district or downtown. So it's 16.6%, which is really high. That's high. A rule of thumb in commercial real estate is 10% is kind of the tipping point between a landlord's market and a tenant's market. So all the ones that are above around 10% are tenants markets, where the tenants have the advantage and they get low rents and concessions and stuff like that. But when the vacancy kind of goes below 10%, it flips to a landlord's market. Okay. So there's two short ones there. One very short would be the fourth bar. What area is that? East Oahu. So if you want to go find space and this is office space in Kaimakee or Kahala or Hawaii Kai, there's virtually nothing available and you're going to pay high rents. Now the third from the right is not really all that low or that high, but it's noticeably lower than the average. Which area is that? That's King Street. So that's a very, that, most of these markets are very small little markets with the exception of the CBD, Kakaako and Kapilani and Waikiki. So that's King Street, not a lot of space there. That rents are a little higher there because the vacancy is low. So I mean, wouldn't the market correct for this? In other words, if I looked at this chart and I saw that a given area was, you know, high low vacancy, low vacancy. And I'm an investor, a builder, you know, whatever. An entrepreneur wants to take advantage of the disparity in those numbers who just showed us, I'd go and build something right away, wouldn't I? And why don't they do that in order to equalize these numbers? That's a great question. And it comes down to cost of construction. So right now our rents in Honolulu have been since the 90s too low relative to the cost of construction. So it's not economically feasible to build a new multi-tenant office building. You have seen some owner users build stuff, but they have a long-term horizon and they think a little differently. But it's cost of construction. What effect does the condo minimization of a given rental office building have on all of this? In other words, what was the one up at the head of Alakaya Street? 1,100 Alakaya? 1,100, it turned into a condo. What does that mean? Come off the market? Do we not care about vacancy and occupancy in a building like that? Because it's owned by somebody. Is that part of the data? It's not part of our survey data. We just surveyed the multi-tenant office buildings. But that particular building does have a little bit of an effect on the downtown office market, because you might have someone who otherwise might run at Pacific Guardian Center or Pioneer Plaza will go buy their office condo at 1,100 Alakaya. But it's a very small effect. Yeah, OK. This is interesting. Do you make these compilations yourself? How do you get the numbers? We do a quarterly survey. We've been doing it since 1999. And I have an assistant who pulls the data and then I spend my own time going through it, because it's really hard to get the data correct. Typically, tenants will get double counted. So what happens if a tenant rents is going to move from, say, Bishop Place to Pacific Guardian Center, Pacific Guardian Center, once the space is leased, they remove it from their listing of vacancies. And so it looks like Pacific Guardian Center is leased up, and they haven't left Bishop Place yet. So you have to go through and kind of say, oh, no, who's moved in order to adjust the numbers to be accurate. So it's a moving target. Yes. You have to be watching this on a fairly frequent basis to get the gestalt feeling about it. That's right. And you need that in your practice. If I'm a client and I come in either a landlord or a tenant, this kind of information is very interesting to me to appreciate the rent, whether it's fair, to appreciate where the locations are that I should consider. Especially because this release information, unlike property sale information, is not public. True. It's not like you can go into the multiple listing service and get this from a public book or have a friendly residential broker tell you about it. Now, this is among a very small group of people, the commercial brokers, all you guys like, walk on water. I know how that works. We've got you fooled, too. OK, let's go to prices now. Let's go to rents. You had another chart on that. OK, yeah, the rent slide. So if you look at the rent slide, you notice the left two bars are some of the lowest total rents in Honolulu or on the island of Oahu. And those happen to correspond to the two bars on the vacancy slide that had the highest vacancy. So this chart is also by area. There's a geographical chart just as well. Same, yeah, same geographic areas. The bars are the same bars. Is it a perfect correlation or is it a little looser than that? It's looser. And what gets lost in these charts is the massive impact of the CBD or downtown. I mean, downtown has half of all the space, the office space, on the island. Let me talk about 2, 3 million square feet. The total's about 11 million square feet. 11 million? Yeah. I haven't been watching. There you go. And downtown's five and a half of that. OK, oh, OK, five and a half of that. Yeah, so five and a half of the 11. And then you throw a Capilani, Cacaco, and Waikiki, and you get to 80% of all of our office inventory is like right here. So that chart shows the correlation, however loose it might be. But what about the drift you mentioned? It changes. It's dynamic. It's always dynamic. Markets are always dynamic. So what is the dynamic? Is it going up? Is it going down? Is it still flat? You mentioned that it has been relatively flat. And with three, I need to know about this, with three factors, three events, three phenomenon, phenomena that we need to consider to examine the dynamic of the numbers of vacancy. And for that matter, right? Yeah. To summarize the office market, occupancy or vacancy, which are the same different sides of the same coin in our market for the last 20 years have stayed roughly static. You do graphs, it's just a flat graph. And because there's been no supply of new inventory, in fact, there's actually been a removal of inventory. So Waikiki is a really great example of what could happen. Do you remember the Waikiki Trade Center? Sure. Which is now the Hyatt Centric. So that had almost 200,000 square feet of office space in a Waikiki market, which was like a little over a million square feet of total. And when you looked at it, at one point, the vacancy in Waikiki hit 20% or 21%. And virtually all of that vacancy was in Waikiki Trade Center. And rents were around $3 a foot. That's incredible pressure on the landlord, isn't it? That's way over that 16% you talked about earlier. Way over. Yeah, yeah. And so rents were about $3 a foot. So they took that building and that inventory out of the market. And rents jumped to over $4 a foot as vacancy dropped from 20% to under 10%. They took it out of the market by doing what? Converted it from office space to a hotel. OK, no offices, all hotel rooms. That's right. Which actually was a, may I say, I hate to use this term, but a higher and better use, don't you think, in Waikiki? Absolutely. Get more than $4. Yes, you're getting premium rents down there because there's no space. If you're a tenant who wants to be in Waikiki, you're going to have to pay up. So this is really interesting. So a landlord, aside from this problem we mentioned about the cost of construction and all that, a landlord has to be akamai about changing the use without rebuilding. I'm sure there was a lot of remodeling going on to make it into hotels, but there wasn't have to rebuild the whole building. And therefore, it's a lot cheaper than starting from the ground up. And so a landlord can do these things, I suppose, not that this would happen, I suppose you could go the other way too. You could take a perfectly good hotel and make it into office, although no one would ever do that. Right. I mean, there's more demand for hotel rooms than there is for office space. Wait till the next flood, yeah. Or rising sea levels. There you go. OK, so anyway, so that's one factor you mentioned. There were two other factors. Well, so the converse, so that's the elephant. So the exciting thing about the market right now is we've had really nothing to talk about for the last 20 years, because everything has been static. And rent downtown has been what? Between what, a dollar and a dollar, $25, $50? Well, not a base rent. So the base rents are two pieces. There's the base rent that the landlord collects, plus what they call the operating expense or camp. Yeah, but just talk about rent now for a moment. So the base rents have stayed static around a buck and a quarter to maybe a buck, $50, maybe a dollar to $1.50 in that range for 20 years. Yeah, that really is interesting. And because you look back, you're saying it wasn't that much different five or 10 or 15 years ago, and still in that zone, it's almost a comforting thing for a tenant to be able to predict that it's going to stay in that zone. But you're here to tell us it's not going to stay in that zone. But the tenant has paid more, because guess what? Why? The cam or operating expenses have gone up because our friend, real property tax, our friends down at the city council have not raised residential rates, but they've raised commercial rates. And then electricity for air conditioning, fuel prices have gone up, labor for janitorial, for security. So the tenants are paying more in total rent because the cam has gone up. But the landlords are collecting the same thing they've been collecting, except for parking, which has gone up. Yeah, they make more on parking. Another profit center. But it's really interesting that these expenses grow up, and sometimes, I'm sure you've seen this, they come down. But for example, fuel, you know, in the calculation of operating expense in the year following the year, the subject year, you could actually have a reduction in the cost of energy. It doesn't happen all the time, but it does happen once in a while. And then, you know, what that tells you is, oh, my God, it could be operating expenses could be flexible enough to come down, but it's not true. It's a deception. Because in fact, most of them go up. That's right. And the tenant, even though the landlord doesn't have a benefit of this, the tenant winds up paying more. Paying more, yeah. Insurance, so we get a disaster with big insurance payouts. The insurance is going to go up, and that's going to get, that's in your cam, too. Yeah. Uh-oh. So what is operating expense now in the downtown area on the average, roughly what? Roughly about an interesting thing as you walk into a building today, you're going to pay, or they're going to ask you to pay a $1.50 in base rent and a $1.50 in cam. Yeah, so you. So for an even $3 or thereabouts. Before we go to the break, can we talk about those other two factors you mentioned? Sure. So the other two factors, other than the, we had the conversion, which we'll talk about after the break, because that's a big one. The other two factors is the, oh, HPU, Hawaii Pacific University, is moving about 100,000 square feet of its occupancy to Waterfront Plaza and a little bit to Pioneer Plaza. And so that's going to have a big impact. And then the other one is American Savings Banks campus across from Mahala Park. And in fact, they're moving a bunch of people out of rented space to that space. So does that affect their space in Bishop Square? Actually not. They're having HECO use that space. So they actually don't have a lot of space in Bishop Square, even though they've named the building after them. Anyway, so we have changes going on with these three factors. And when we get back for this break, let's talk about how those changes are going to affect things, up or down, landlord or tenant, how exciting. It's like looking into the crystal ball with downtown Jamie Brown. We'll be right back. Aloha and mabuhay. My name is Amy Ortega Anderson, inviting you to join us every Tuesday here on Pinoy Power Hawaii. With Think Tech Hawaii, we come to your home at 12 noon every Tuesday. We invite you to listen, watch for our mission of empowerment. We aim to enrich, enlighten, educate, entertain, and we hope to empower. Again, maraming, salamat po, mabuhay, and aloha. Aloha, this is Winston Welch. I am your host of Out and About, where every other week, Mondays at 3, we explore a variety of topics in our city, state, nation, and world, and events, organizations, the people that fuel them. It's a really interesting show. We welcome you to tune in, and we welcome your suggestions for shows. You got a lot of them out there, and we have an awesome studio here where we can get your ideas out as well. So I look forward to you tuning in every other week where we've got some great guests and great topics. You're going to learn a lot. You're going to come away inspired like I do. So I'll see you every other week here at 3 o'clock on Monday afternoon. Aloha. Yeah, business in Hawaii. Downtown Jamie Brown, wow, so exciting. You know, there was this government building on Richard Street across the bandstand, and it was involved in some asbestos for like 20 years. And now it's coming back. Is it going to be affecting? The Princess Kamamalu building, about 70,000 feet. And as I said before, there's really been nothing built since 1st Hawaiian Center in 96. That's multi-tenant, except there's a bunch of owner-user buildings without being won. And the effect of that building was pulling occupancy out of some of the class B and C buildings. You know where Roots and Relics is? That building on Richard Street, 850 Richards. Tenants moved from there. They also moved from, I believe, the Malim building. So there was an impact. So it created vacancy in the CBD. Yeah, and what that takes us to the whole question of government. I mean, if you came clear back when the state of Hawaii was going to take huge amounts of office space downtown, is that still the case? How does the Kamamalu building affect that in terms of their appetite for taking office space in regular office buildings rather than in state buildings? You're right. Government, city, state, and federal keep growing in their footprint of office space. In years past, would rent private office space and reduce our vacancy. However, in this last cycle, they've created new space outside, which has absorbed that demand. So they've got the Princess Kamamalu building, and then NOAA, National Histographic and Atmospheric Administration, built a huge 150,000-foot building on Fort Island. And they moved out of a ton of space at Pacific Guardian Center, 1601 Kapi'olani in Hawaii, creating vacancy. The FBI built their building in Kalailoa, and they created a vacancy in the federal building, which then drew tenants out of private buildings. So the government occupancy definitely affects. And if they create space, it creates vacancy. Yeah, right. And it could be by surprise, and it could be relatively speaking, and it could be large amounts of space. Let's go back to what you said you were going to cover some more, and that's the conversion. OK, so the big, well, there's the three things. So the one negative thing that will hurt the market a little bit is American Savings Bank's new building across from Ala Park. That's 135,000 square feet, 600-something employees. They're going to move out of some space that they're renting in 677 Ala Moana, the former Go-Bomb building, the Chinatown, and a bunch of other places. So they'll have a little bit of a negative effect. They'll increase vacancy a little bit. And they have this little building next to Bank of Hawaiian that they're going to put on the market that they own, that little black building. And that's probably a good office condo conversion. So that'll hurt the market a little bit. However, that's probably offset by Hawaii Pacific University's move to fill up vacancy at Waterfront and Pioneer. But the really big one is Bishop Place, the 1132 Bishop Street, the former First Hawaiian Tower, 460,000 square feet that is slated to be converted to residential rentals downtown, nice rentals. So if you take out of maybe 800,000 feet of vacancy that's in the downtown area, and you take more than half of it off the market, that will take that 16.6 vacancy number. And it's going to put it, guess what? Below the magic, 10%. Tipping point. And the market will go from a tennis market to a landlord's market. Oh, that's so interesting. But a big question, sort of like in the stock market, they say the stock market builds in news about future events into current prices. Does that happen in the commercial real estate market? Does that happen here? In other words, if I hear there's going to be a conversion, 1132, and I know that's going to have a profound effect in dumping space or rather subtracting space off the office market, isn't that right? Then I should adjust myself at some point. Why not adjust myself right now? What do I wait? How does the market react? I think it's going to react. The owner of Bishop Places, Douglas Emmett Group, which also owns Bishop Square and Harbor Court, so they have a sort of a double positive effect if they convert, then that helps them fill up space at those office buildings. They haven't announced their decision on doing this conversion yet. I guess they're still working through some details. But the word's getting out on the market. You haven't seen landlords raise rates yet, but I think there's a lot of landlords out there that are just waiting and salivating over the opportunity to raise rents. Sure, they'll do as soon as they can. Yeah, so you haven't seen it yet, but if I was a tenant, I'd be looking at my office space situation now because it's about to happen. The lag time till reality, though, is going to be like three years anyway, right? Probably. They're talking about taking a number of floors at a time as tenants vacate. They're not going to vacate the whole building. Yeah, sure, why not? You can do that. One thing also is that you have 1080, 1088 and 1188 on the street, that was Bishop Street there, and they're both AC Ducey buildings. You heard it here, I think. Yeah, you heard it. It's just going to be an AC Ducey building or just residential. Just residential. And Douglas Summit, it's a publicly-traded REIT, well-funded, they're going to create a great rental project downtown. So for people who want to live downtown and rent a nice apartment downtown, this is going to be a great opportunity. Yeah, well, that raises a couple of points. Gee, I wish we had more time for this conversation. A couple of points. If I see, I want downtown. Chinatown has not realized its promise. Chinatown, because of that parking requirement, no developer goes in there and the space is not being converted and it's either junk or it's so expensive, nobody can touch it. So there's no great move into Chinatown. This could be a great opportunity for those people who would, as you said, like to live downtown. But because of that, it could be that what might otherwise be affordable, right? It's not affordable anymore. It's way expensive. There's a lot of market pressure by potential buyers. What's going to happen there? Well, I would think the cost to convert that building are going to be high and they're going to do a first-class job of it. So it's not going to be affordable rentals. But it's going to be rentals for executives and middle managers who want to be downtown and can afford it. So it's going to bring probably 500 more people downtown, 24-7, which is really good. But we do need more affordable rentals. I don't think Bishop Place is going to be it. But and people say, well, how are they going to fill it? I think there's a lot of demand. There's a lot of people who want to be downtown, but there's nowhere to rent. Absolutely agree. And it will help Chinatown, all the business in Chinatown. It will really be terrific to have the crowd. When HPU came in and they bought a Loha Tower and all these kids, students walking up and down at Fort Street Mall, it changed the character of Fort Street Mall. For the better. For the better. Oh, it's really very pleasant. I mean, it's one of the reasons that pioneered, in my view, is so aesthetically successful is because those kids walking up and down the street instead of the crowd that was here before. So if you have 500 new relatively middle class or above occupying this new converted building, 1132, that's going to have the same good effect on the quality of life in downtown. Absolutely. Think of the restaurants, shopping. We won't roll up the carpet at 5 o'clock and everyone go home. Yeah. Well, we only have a minute or two left, Jamie. And I wanted to get to the bottom line if I could. The bottom line in this context is why do I care? Why do I care about this? Is this going to affect my life in Maui? Is it going to affect my life in East Oahu, although you did refer to that in terms of the market? Is this something that has an effect statewide? Does it have an effect on our economy? Does it have an effect on bringing investment and business into the state from outside? Does it help young entrepreneurs? Why do I care? I think, well, I think it goes with all. If you look at what's going on in the economy, I just did a report. It's amazing the breadth and the width of construction going on. It's public. It's private. It's high-rise. It's single family. It's renovations. It's infrastructure. It's new builds. It's rentals. It's condos. And all of that means new investment in Hawaii, upgrading facilities. And the more new investment we have, I think that benefits all of us. Having empty vacant office space doesn't benefit really anybody. If we fill that office space with productive use, I think it benefits us all. Is there a critical mass magnetic kind of attraction? In other words, if I say that the downtown office market is going to go to a better level of maturation, if you will, of use of rents, of sophistication, does that gather other tenants? Does that affect investors from outside the state? Do you foresee a more robust market experience in Hawaii for office space? Oh, yes, absolutely. What'll happen is it'll push rents up, which tenants won't like. But that will allow owners to reinvest in buildings. Because right now, it's hard for them to reinvest in an office building because the rents are so low. But if you're collecting higher rents, you can then reinvest in your property. We might be able to build more boutique buildings, more mixed-use buildings. So I think it benefits us all. All both rise. Yeah. Well, I'm left with one impression downtown Jamie Brown. It is a moving target. There are things happening. It's kaleidoscopic in its own way, because so many factors play against so many other factors that you have to come back and tell us more as it goes on. Because this is not going to be static for another 20 years. Guarantee. Absolutely. Thank you, downtown Jamie Brown. Right. Commercial Real Estate. Aloha. Aloha.