Japanese consumers supply the 'yen' and yang in Hawaii's retail market. Historically, the thought of Hawaii has conjured up images of beaches, ocean reefs and pineapple but rarely has it elicited an immediate connection to retail. Until now.

Hawaii's retail, like the rest of the state's economy, has been driven predominantly by the millions of tourists that visit the state each year. Recently, however, Hawaii has become something of a destination retail center, particularly for Japanese visitors seeking bargains rather than sea shells.

Just visiting? To illustrate the draw of Hawaii's retail offerings, Joneric Greene, senior vice president for Honolulu-based Monroe & Friedlander, says the state's 1995 retail sales for visitors was $2.6 billion. "East-bound tourists [i.e., visitors travelling east to Hawaii] spent $1.95 billion in retail expenditures for 1995, compared to only $645 million by west-bound travelers," he adds.

In fact, Greene explains, Japanese tourists make up 40 percent of Hawaii's visitors, and they outspend their U.S. counterparts (mainland visitors comprise more than 50 percent of Hawaii's tourist population) by a 3--1 margin. "In some categories, it's as high as 5--1 or 6--1," he notes.

"Japanese tourists spend over $120 a day per visitor," says Kenneth Fridley, an associate in the Honolulu office of Los Angeles-based CB Commercial Real Estate Group Inc. "That's retail spending -- it doesn't include hotel or food purchases."

Attracted to value Ironically, the impressive spending numbers that are driving Hawaii's retail are the result of Japan's economic downswing, says Ross Murakami, audit and business advisory services manager in the Honolulu office of Chicago-based Arthur Andersen & Co. "The bubble in the Japanese economy burst around the same time as the Gulf War in 1991," he explains.

The Japanese had invested a lot of money abroad, but "most of their investment money was leveraged off their own domestic holdings," Murakami notes. "You had a market in Japan basically based on inflated real estate values, and when those went down there was no collateral to cover their borrowings overseas."

The buying power of the Japanese yen decreased dramatically, and with the change came a corresponding drop in tourism for Hawaii. Dr. Pearl Imada Iboshi, chief economist for the Department of Labor and Industrial Relations for the State of Hawaii, says Japanese tourism dropped from close to 7 million in 1990 to 6.1 million in 1993. "But by 1995 the number of tourists increased to 6.6 million, and for 1996 it was 6.7 million. It's been inching back up," she reports.

Japanese have returned to Hawaii in part because of a change in consumerism, says Murakami. They have become more discriminating and are willing to travel overseas for the value they seek.

"When the factory outlet stores at Waikele were first being put together, no one considered the Japanese" as part of the demographics, Murakami observes. "But they have flocked to the outlet stores."

Power centers are attractive as well, says Leroy Laney, chief economist for First Hawaiian Bank, Honolulu. "No one expected the Japanese to come to Hawaii and buy household goods, linens or flatware, but they are. They also are buying kitchen gadgets and cordless screw drivers," he notes. Laney reports that many Japanese tourists take the half-hour bus ride outside of Waikiki to shop at Eagle Hardware and Garden.

The influx of discriminating consumers bodes well for retailers, says Fred Noa, vice president of Honolulu-based Chaney-Brooks & Co. "The Japanese still like luxury goods, [but] they are more value conscious," he notes, adding that retailers such as The Gap, Banana Republic and Calvin Klein are poised to increase their presence to meet the demand of Asian tourists.

Economic growth is slow Affected by Japan's economic downturn -- which pulled in tourism and investment dollars -- Hawaii's economy has grown slowly since the early 1990s. Unemployment, which stands at around 5 percent in Hawaii, has not been affected, however.

"We've been losing jobs for four years, but our numbers are insulated because if people lose their jobs here they go back to where they came from," says Laney. "The cost of living is so high here that their unemployment benefits can't cover the rent."

As the overall number of jobs has declined, Hawaii's retail employment has risen steadily, albeit slowly, over the last five years. The Department of Labor and Industrial Relations' Research and Statistics Office forecasts an average annual growth rate of 1.3 percent through the year 2005, adding 16,200 new retail workers to the 1994 figure of 111,510.

Although Hawaii's population grew by only 4,525 people in 1996, the total number of residents -- 1,183,723 people -- represents an increase of 54,000 since 1991. In 1990, the state's median household income was $38,921, and it reached $42,851 in 1995.

Retail mix is changing Whether they are catering primarily to the well-heeled or value-seeking tourist, Hawaii's retailers are sailing in high tide. "Some of our stores in Waikiki do the most volume of any store in their systems, and that includes Hong Kong, Paris or New York," says Greene.

"There are rumors that some stores are down by as much as 25 percent," he continues. "But some high-end, luxury retailers [have done] sales in excess of $15,000 per sq. ft., and if it dropped to $12,000 or $10,000 per sq. ft., that's still phenomenal."

In fact, the success of upscale retailers such as Luis Vuitton, Chanel and Burberry's has displaced local "mom and pop tenants" in Waikiki, says Steve Sofos, president of Honolulu-based Sofos Realty Corp. At the same time, new department stores and big-box tenants are moving into the market.

For example, according to Sofos, Neiman Marcus is scheduled to open a 160,000 sq. ft. store in 1998 at Ala Moana Center in Honolulu. Nordstrom will join the center's roster in 1999, pushing Ala Moana's GLA to more than 2 million sq. ft.

Sofos reports that Circuit City entered the Honolulu market last year, building a 100,000+ sq. ft. store at Pearlridge Mall. In Waikiki, King Kalakaua Plaza is welcoming Niketown, which is scheduled to open a 25,000 sq. ft. store later this year.

Signing 'as is' With retail sales up, Hawaii leases are in demand. Total GLA for retail space in Hawaii is 15.5 million sq. ft., with an overall vacancy factor of about 6 percent, according to Fridley.

At Waikiki's Royal Hawaiian Shopping Center (which caters almost entirely to tourists) lease rates start as low as $4 per sq. ft. but skyrocket as much as $25 per sq. ft., depending on the store's location.

"That doesn't include premiums paid by the retailers," says Sandy Donnot, a senior associate in the Honolulu office of CB Commercial Real Estate Group Inc. She notes that one retailer paid a $2 million premium, called "key money," for a 1,000 sq. ft. space at Royal Hawaiian.

"We rarely do deals in the resort area malls, because there is no demand for our services," adds Donnot. "There are always people on waiting lists."

At the Windward Mall, a 530,000 sq. ft. center located on the northeast side of Kanehe, leases range from $1.50 per sq. ft. to $2.50 per sq. ft. The center caters strictly to local traffic and has a 93 percent occupancy rate.

Prices rise again in Honolulu. For example, leases at 407,000 sq. ft. Kahala Mall in east Honolulu or 1.2 million sq. ft. Pearlridge Mall, both of which have a vacancy rate of approximately 5 percent, range from $2 per sq. ft. to $3 per sq. ft.

At Ala Moana, where prospective tenants are placed on a waiting list, leases range anywhere from $5 per sq. ft. to $9 per sq. ft. "They hand you a contract that says: 'Here's your rent.' There are no negotiations; you simply sign as is," says Sofos.

Smaller centers still strong Outside the malls, neighborhood shopping centers under 125,000 sq. ft. "are doing well for the most part and are 98 percent leased," says Sofos. Most are anchored by a Foodland, a local supermarket company with about 50 stores, or a Safeway, which has about 20 stores in Hawaii.

Payless drug store pulled out of Hawaii three years ago, leaving the market to Long's Drug Store, which has "done very well," says Sofos. "They sell mangos and shredded coconut, and cereal [at Long's] is cheaper than [it is] at Safeway." Despite Long's success, "there is definitely room for competition," Sofos adds.

Attracted by Hawaii's lack of traditional secondary tenants, companies such as Office Depot, OfficeMax, Wallace Theaters and others are poised to hop the islands, says Sofos. "They're looking to fill the void and will produce a unique blend of tenants for some neighborhood centers," he adds.

Although neighborhood centers continue to perform well, Hawaii's power centers are headed for fallout, analysts predict. In the late 1980s and early 1990s, the initial wave of discounters such as Costco and Kmart "really changed the retail environment here," says Noa. "They created the opportunity for a second wave of retailers such as Borders Books & Music, Barnes & Noble, Sports Authority, and other big-box retailers and category killers."

"Total retail sales in Hawaii over the last five years has grown 12.6 percent, but in the same period our inventory has increased by 22 percent. The additional square footage is diluting the sales per square foot and the performance of every retailer," says Greene.

"Five years ago we used to be underretailed. We had 15.5 sq. ft. per capita statewide, and a lot of that was in the resort markets," he continues. "Now we're up to 18.1 per sq. ft., close to the national average of just under 20. Our market is not as unique as it once was."

As the sediment settles from the second big-box wave, Donnot notes that there are some retail segments -- for example, bed and bath, auto parts/accessories, children's superstores, and pet supplies -- that Hawaii is still seeking to attract. "At this point, there's a question as to how many more big-box retailers can come into town and just how much more our marketplace can support," she says.

Donnot does foresee an upswing in entertainment retailing, which has yet make its mark in Hawaii, she says. Doug Smoyer, president of Honolulu-based Retail Strategies, agrees.

"For a long time we thought that the sand, sun and surf were enough," says Smoyer. "But the Asians are very sophisticated, and they want some action, too." He anticipates that retailers such as Virgin Music and SEGA(TM) GameWorks soon will enter the Hawaii market.

Influx to continue Although there are a variety of projects under development in Hawaii, only major players are making it to the table, says Sofos. Land prices and development restrictions are keeping many players off the field, he adds.

For example, in Waikiki, "land values are $200--$500 per sq. ft.," says Sofos, adding that "there are strict development restrictions, such as big setbacks for the green belt area." Maximizing land value requires underground or elevated parking, which also is expensive, he notes.

Still, those developers that do break ground can expect healthy returns, says Smoyer. Kona Airport recently lengthened its runway, and there are now direct flights from Japan to the Big Island of Hawaii, he notes.

"The number of Japanese tourists visiting the Big Island has increased in direct proportion to the number of non-stop flights," Smoyer explains, adding that direct flights are scheduled for Maui in 1999 and later in Kauai. New avenues of access and new consumers will prove to be a "renaissance" for the Hawaiian retail market, he predicts.

Karen St. George is a Pasadena, Calif.-based freelance writer.

General Growth Management of Hawaii Inc., a subsidiary of Chicago-based General Growth Management, has entered into an agreement with Tokyo-based Daiei Inc., to provide consulting representation services for the proposed Port Island II expansion project in Kobe, Japan. Under the terms of the agreement, General Growth Management of Hawaii would be responsible for development, international leasing and management training for the project. If plans are approved by the city of Kobe, the 2 million sq. ft., mixed-use project is expected to open in May 2001.

* Honolulu-based A&B Properties Inc. has completed renovation of Kahului Shopping Center in Kahului, Maui. Among the improvements: rustic, plantation-style architectural design features incorporated into the facade, awnings, signage and landscaping. Main tenants of the 109,000 sq. ft. center include Ah Fook's supermarket, Maui Garden & Hardware, and Fun Factory.

* Los Angeles-based Forest City Development California Inc. and Honolulu-based Keeaumoku Partners have signed an agreement to explore the feasibility of developing Keeaumoku Superblock in Honolulu. Construction is scheduled to begin by early 1999 for the 517,000 sq. ft. project, which will feature a theater, bookstore, upscale supermarket and entertainment when it opens in spring 2000.

* General Growth Management of Hawaii Inc., a subsidiary of Chicago-based General Growth Management, is renovating and expanding Ala Moana Center in Honolulu. The 1.7 million sq. ft. center, which is anchored by Sears, JCPenney and Liberty House, will grow 296,000 sq. ft. by fall 1998 with the addition of a 160,000 sq. ft. Neiman Marcus store and 136,000 sq. ft. of "lifestyle" retail. Changes to the interior will reflect the Hawaiian landscape with lush foliage, and Center Stage -- the mall's courtyard -- will be refurbished. In addition, the 1,000-seat food court, called Makai Market, is being expanded and renovated to accommodate an additional 300 seats and reflect a nautical theme. The renovated food court will open in November. Another anchor will be added, and an entertainment expansion is planned adjacent to the theater in the future.

* Horizon Group Inc., Norton Shores, Mich., has recently renovated The Dole Cannery, a 250,000 sq. ft. value center in Honolulu. In addition to giving the center a facelift and new paint job, Horizon renovated and reconfigured the interior with the formation of new corridors, an atrium, and galleria; the addition of historical exhibits; and the creation of uniform storefronts. Tenants include California Luggage Outlet, Docker's Outlet, Famous Footwear and Levi's Outlet. A 136,000 sq. ft. Home Depot store will open adjacent to The Dole Cannery in 1999.

* The MacNaughton Group, Honolulu, is building Maui Marketplace in Kahului, Maui. The 315,000 sq. ft. value center is anchored by Borders Books & Music, Eagle Hardware & Garden, Home Outlet, OfficeMax, The Rack by Liberty House, and Sports Authority. A grand opening is planned for this summer.

* Kahului, Maui-based Maui Land & Pineapple is planning to expand the Kaahumanu Theaters at Kaahumanu Center, a two-level, open-air mall in Kahului. The mall's theater component will grow from six screens to 15 screens when construction begins in January 1998. The 572,896 sq. ft. mall is anchored by Liberty House department store, Sears, JCPenney and Shirokiya. It will soon add Benetton Sportsystem Cafe to its tenant roster, making Kaahumann Center the second U.S. location for the new Benetton concept.

* Indianapolis-based Simon DeBartolo Group Inc. and Victoria Ward Ltd., Honolulu, are building Victoria Ward shopping center in Honolulu. When it opens in spring 2000, the 736,000 sq. ft. project will feature retail and entertainment components. It will be anchored by Saks Fifth Avenue.

* Honolulu-based Waikoloa Land Co. will expand Kings' Shops in Waikoloa from 55,000 sq. ft. to 70,000 sq. ft. by the end of the year. Tenants have not been announced for the expansion. The center features Dolphin Galleries/Tiffany & Co.