Office space conversions fuel $1B downtown Honolulu investment cycle

Mar. 24—Investors hope to convert excess office space into residential rentals and fee-simple housing, hotels, educational space, retail, activity centers, food and beverage venues, and community services like dog parks and senior care.

The lights are brighter in downtown Honolulu where post-­pandemic changes to work and lifestyle patterns are fueling an investment cycle that is expected to deliver at least 15 new projects valued at about $1 billion over the next five to seven years.

During the pandemic, low interest rates and the quest for wide-open spaces drove many Oahu homebuyers into the suburbs, especially as employers began offering remote and hybrid work options. Vacancy rates rose in office buildings in Honolulu's prime central business district.

The change has drawn investors who hope to convert excess office space into residential rentals and fee-simple housing, hotels, educational space, retail, activity centers, food and beverage venues, and community services like dog parks and senior care.

The result is expected to yield a more balanced market that improves safety and allows downtown Honolulu to thrive outside of the traditional 7 a.m.-to-4 p.m. work window.

Christine Camp, president and CEO of Avalon Development Co., provided the $1 billion estimate to the Honolulu Star-Advertiser last week.

"Avalon isn't the first. We're just the latest and we won't be the last, " Camp said."There's a huge wave of investment that will bring fundamental changes. When you have that many people in a six-block radius thinking about the same things it will happen."

Camp's remarks followed the blessing of Modea, the company's reuse project that will turn part of the 22-story Davies Pacific Center into a fee-simple condominium with 352 units. New life is also planned for the former Fort Street Walmart, which Avalon acquired this month for $38 million.

Camp said Avalon's recent purchases of at least three city blocks puts the company among the major stakeholders committed to the downtown revitalization.

Other stakeholders in the revitalization include : Douglas Emmett, Continental Assets Management, 'Ikenakea, Rick Cho, Colbert Matsumoto, Hemick, Central Pacific Bank, Hawaii State Federal Credit Union, Hawaiian Host and Mauna Loa Macadamia Nuts, Hawai 'i Pacific University, the Catholic Diocese of Honolulu and Catholic Charities Hawaii's Housing Development Corp., and WKF Inc., lead by Duane and Robert Kurisu.

Camp said WKF has been moving businesses displaced from the Keeaumoku district into downtown, such as Evergreen Adult Day Care, which is going into the Hansmann Building, as well as supporting new growth across the downtown blocks that they own.

Mark Bratton, senior vice president for Colliers International, agreed with Camp's estimate and said that together, these stakeholders are making a difference by reviving a conversion trend that started in Honolulu and cities across America before the pandemic.

"When you look back at 2018 and 2019 in downtown, the health of the businesses, the retail and art community and Chinatown, things were thriving, " he said. "The pandemic dealt it a huge blow like a lot of downtowns around the country, most notably San Francisco.

"Lucky for us we have these handful of local leaders willing to stand up and invest and take on risk to reinvigorate downtown. It's taken several years to reset from the pandemic, and the only way out of it is to reinvest and make it a thriving 24-hour marketplace."

Camp said there were already signs that downtown was ripe for change before Avalon bought the Davies Pacific Center.

She said in 2021, Hemic converted the American Savings Bank Building, which the bank had vacated in 2018, into office space for over 100 employees. She said Central Pacific Bank also completed a $40 million investment in its downtown headquarters in 2021.

Camp said the Hawaii State Federal Credit Union opened in June 2023 with 230 employees. There's also a new Hawaiian Host and Mauna Loa Macadamia Nuts headquarters.

After the opening of The Residences at Bishop Place, a Douglas Emmett residential rental conversion at 1132 Bishop St., Camp said she knew there was enough demand for Modea if people were willing to pay $2, 375 monthly rent for a studio and $3, 725 for a two-bedroom with extra fees for parking and pets.

Modea, at 1698 Queen St., is aimed at Hawaii's middle-income singles, families with small kids, and what Camp refers to as "sinkwads and dinkwads, " which translates into single or double incomes, no kids with a dog.

F. Kevin Aucello, principal and co-founder of Powell & Aucello, said the new residential and food and beverage development combined with downtown's proximity to businesses and government buildings also has fueled a hotel investment cycle. He said 'Ikenakea's Chris Flaherty is developing a 15-story, 240-unit hotel at 112 N. Nimitz Highway. Aucello said the hotel, which is near a future Skyline station and overlooks Honolulu Harbor, is likely to be branded a Hyatt.

Aucello said another possibility is the conversion of the three-story Wo Fat Building at 115 Hotel St. A partnership team, including Donald Kenney, former University of Hawaii football coach June Jones, Dickie Chang and John Davenport, have announced their intention to build a 100-seat ground-floor restaurant topped with 23 luxury hotel rooms.

"I think we'll see at least a couple more downtown hotels in addition to what's already opened. Interest will depend on how many get completed, " Aucello said.

He said the planned hotels would join the longtime Aston at the Executive Centre Hotel and the newly opened AC Hotel by Marriott Honolulu, which "has been a smashing success."

Pandemic recovery Patricia Chang Moad, vice president of operations for Continental Assets Management, a private real estate investment company founded by her father, Andy Chang, was an early pioneer to the current downtown development cycle. The company developed the recently opened 112-room AC Hotel by Marriott Honolulu at 1111 Bishop St. in the old Remington College office building.

"COVID hit two months into escrow. We were shell-shocked, " Moad said. "It was a ghost town and there was a point where we had to decide whether to move forward. But I've been a professional in downtown Honolulu for 15 years and my chosen playground has always been downtown and Chinatown, and we strongly believe in this community of hardworking business owners."

Moad said Honolulu's pandemic recovery has been slow, but ultimately has paid off. The proof is in the robust occupancy rate since the Dec. 12 hotel opening as well as "all the influx of business owners who believe in this market and are now investing a considerable amount of capital."

"We are so excited to be at the forefront of this renaissance of downtown, " she said. "We're bullish on downtown and we are planning even more investment."

Developers often succeed because they can read the tea leaves, finding that bit of future left after the cup is otherwise empty—and there has been a lot of empty in downtown Honolulu.

Mike Hamasu, Colliers International research and consulting director, said Oahu's office vacancy rate, which had improved to 10 % in 2019, rose above 13 % in 2023, and was expected to continue climbing.

"But with all the office conversions that have started or are being planned, we are projecting maybe by 2025 there may be a reduction of about 1 million square feet of office space. Without that, a lot of it would have probably been vacant space, so a vacancy rate that might have skyrocketed to about 16 % is hovering at about 14 %, " he said.

Jamie Brown, president and owner of brokerage firm Hawaii Commercial Real Estate LLC, said a reason that downtown Honolulu was hit hard by the pandemic was its office footprint, which historically "has been about 50 % of the office inventory of the entire island, and virtually the entire state."

Brown, nicknamed "Downtown Jamie Brown " by colleagues, said the The Residences at Bishop Place offset the office market decline during the pandemic, and Modea saved the office market from its post-pandemic hangover.

"This stuff all started a few years ago, but because of permitting you are just now starting to see the fruits of everyone's labors, " he said. "What's occurring now is the biggest change to the Honolulu office market since the mid 1990s, when we built a whole lot of office buildings. That was an exciting time, but what followed was a pretty healthy recession and we never really worked out all the supply."

Brown said demand for the remaining downtown office space will rise. He said Thursday that he received his first email since before the pandemic from an investor looking to make a downtown office investment. "It's going to be turbocharged by all the other investments in downtown, " Brown said.

New additions Change is coming fast. The convenience store 88 Mart last year filled the Executive Centre space vacated by Longs in 2022. Paris Baguette opened on Bishop Street in February and Bratton said "their opening days were better than any of their other Paris Baguette stores that have ever opened in the U.S."

New opportunities will accompany Avalon's redevelopment of the Fort Street Walmart, which spans 87, 000 square feet of space and 454 parking spaces, at South King and Bethel streets.

Camp said Avalon Group plans to build about 100 residential units above the property's parking garage and set aside half of the building for recreational entertainment and half for commercial use. The plan is to add a new tower behind Walmart with retail on the ground floor and about 300 units on top, she said.

Avalon's plans also include adding pickleball courts and a "destination dog park " for residents and guests outside of the building, she said.

Other Avalon downtown projects include consulting on the Diocese of Honolulu and Catholic Charities Hawaii's Housing Development Corporation's senior housing project Hale Kamiano. And the firm is working on Hawaii Pacific University's three-story Science Hall under construction.

Camp said downtown revitalization has been helped by the growing concentration of large business owners with common goals. She said Tradewind Capital Chairman Colbert Matsumoto is putting together a block of property owners who can move in sync with the first meeting planned for May.

She said existing owners are working together to beef up security to address concerns about crime and homelessness, and are exploring forming their own business improvement district.

"There's a Fort Street Improvement District already. But it's time for a downtown district. This is a place where major investment needs to be made, " she said.