In the past year, Hawaii has become a hotbed of commercial real estate activity. A construction boom in the retail and apartment sectors is being fueled by robust tourism and low unemployment. Meanwhile, mainland U.S. investors have shown more interest in the state after an East Coast company purchased some of Hawaii's most desirable industrial properties.

Waikiki, the state's center of tourism, is undergoing a much-needed sprucing up through significant retail and resort redevelopment. The area near downtown Honolulu has been threatened in recent years by newer development in South Kohala and other, more modern, resorts of Hawaii.

Overall, there is close to $1 billion of retail development and redevelopment on the drawing board across the state, according to Wendell Brooks, a vice president with PM Realty Group. Much of that building is in Waikiki. “By 2007, Waikiki will be a whole new place,” predicts Jeffrey Hall, a researcher with CB Richard Ellis in Hawaii.

The Outrigger Hotels chain is rebuilding several of its hotels in Waikiki and adding 250,000 sq. ft. of resort retail. Kamehameha Schools, Hawaii's largest private landowner, is spending $84 million to redevelop and modernize the 293,000 sq. ft. Royal Hawaiian Shopping Center.

Higher retail sales and strong tourism are driving investments. The state is expecting over 7.3 million visitors this year, up 5% from last year. Immediately following 9-11, the number of annual visitors dropped below 6 million. Many visitors will eat at mainland restaurant chains, such as Romano's Macaroni Grill and The Cheesecake Factory, which are replacing older, locally based restaurants that populated Hawaii for so long.

On the residential side, strong federal spending is energizing the sector. In May, Actus Lend Lease landed a $2.2 billion contract to develop 5,400 new homes and renovate 2,600 existing homes at seven different military bases on the island of Oahu over the next 10 years. This is currently the largest family housing project within the Department of Defense.

Meanwhile, mainland U.S. investors, which historically were rare acquirers in Hawaii, have been picking up some high-profile properties. In June, HRPT Properties Trust, a Newton, Mass.-based REIT, purchased 188 acres of industrial land in Oahu for $115 million from the estate of James Campbell. The cap rate on the buy was 7.5%.

The acquisition will boost HRPT's portfolio in Oahu to 412 acres, making it one of the largest owners of industrial land in the state. In 2003, the company purchased a 224-acre industrial site from the Damon Estate for $480 million.

“Hawaii was appealing to us because the economy is improving locally and the industrial market is very tight,” says Adam Portnoy, executive vice president with HRPT. The industrial vacancy rate in Oahu is only 1.6%, reports CB Richard Ellis.

HRPT's two industrial sites have a blended occupancy rate of 98%. Both are fee-simple properties, meaning HRPT owns the land, but occupants of the park own their buildings and lease the ground from HRPT. The fact that HRPT is able to own land directly is rare. About 90% of Hawaiian land is owned either by the government or private estates, according to Brooks of PM Realty Group. The owners, in turn, often sell ground leases.

Several of the estates, most of which have owned their land since the 1800s, still exist. But they rarely sell. Damon Estate, which sold the 412-acre tract to HRPT in 2003, is in the process of liquidating its assets. The Campbell Estate, which sold to HRPT in June, is converting to a for-profit entity.

“I don't think there's going to be a lot more estate sales of land in Hawaii,” Portnoy says, “unless there's a reason (for estates) to liquidate.” Because of HRPT's purchases, East Coast investors are now more interested in Hawaii's industrial properties, local brokers say, even if investment opportunities are rare.