Hawaii looks like paradise, to be sure, and it is paradise to the thousands of people who vacation there each year, but residents know that the high cost of living and often poor employment opportunities make Hawaii something a little less than paradise. How are commercial real estate investors faring in the tropical paradise of Hawaii?

The Hawaiian industrial market is so tight that vacancies in Oahu have dropped to below 2%, and forecasters don't expect the market to loosen up for the next couple of years. Even the 9.6 million square foot Kalihi-Sand Island District has a vacancy rate of .75% - three quarters of one per cent. Over the past few quarters, the market has absorbed more than 100,000 square feet of industrial space and is crying for more. Rents are at all time highs and are expected to stay high even though several more large industrial properties are slated to come online in the near future. Even so, speculative industrial construction is unlikely because of the high cost of land and construction. Instead, developers are turning to industrial condos. Average asking rents are at about $1.14 per square foot, up from about $1.10 this time last year. As rents have risen, so have operating costs, from about 24 cents per square foot to 27 cents.

Hawaiian retail and office spaces are just as hot, with vacancies for retail and office space both at about 4.5% - the lowest they've ever been. As in the industrial market, the retail and office markets aren't expected to loosen up any time soon on account of Hawaii's construction labor shortages and the high cost of land. Currently, construction costs for low-rise commercial buildings (typical in Hawaii) are running $300 per square foot, not including land. It takes about 10 years to move land from agricultural to office or retail uses. To cover the costs, operators would have to ask in excess of $4 per square foot. Those developers bold enough to take the risk are finding that they are getting those rents and more.

Hawaii's housing market seems to run countercyclical to that of the rest of the nation. The market collapsed about a decade ago and slept through the real estate boom sweeping the continental U.S. Only recently, as the continental market slowed down, has Hawaii's housing market picked up. The previous Hawaiian housing boom was driven by Japanese investors and speculators, but the new upswing seems driven by retiring baby-boomers - refugees from the continent with the intention of staying in the residences they purchase. The price range for these boomers seems to be about $500,000 to $2 million, and the purchases are spread across all the main Hawaiian islands. There is some concern that local Hawaiian's will be priced out of the housing market, but, as of yet, there are no real calls for affordable housing developments.