Two 20,000-square-foot office buildings in the same Hawaii city with similar tenancy can trade hundreds of basis points apart, according to Mark D. Bratton, CCIM, of The Bratton Team at Colliers International Hawaii. The reasons are identifiable, and they matter for investors underwriting Hawaii commercial property.
Physical condition is the most common explanation, and it measures future capital expenditure. Buyers calculate what each asset will require to bring up to standard, to lease, and to maintain. Elevators, roofing, plumbing, and electrical systems all sit behind that number, and with construction costs where they are, the figure moves quickly. "You can quickly spend lots of money on any of these assets," Bratton says. That expected spend is priced into the offer, so two buildings with identical income can attract materially different bids. Newer product carries a related premium because its capital requirements sit years out rather than immediately.
The largest single driver of spread in Hawaii is whether the buyer is acquiring fee simple interest or a leasehold position. More than half of investors will not consider leasehold under any conditions, which narrows the buyer pool enough to move pricing. Bratton puts the differential at roughly 200 basis points: where a fee simple building prices at 6.75 percent, the leasehold equivalent might begin around 8.75 percent. He frames that as a starting point for investigation rather than a conclusion. Leasehold is not one thing; a building with two years remaining before reversion and one with 99 years at nominal rent are entirely different propositions that share a label.
For leasehold assets, the terms that matter most concern when and how the ground rent resets. The conventional Hawaii structure runs about 60 years, with the first 30 years fixed and known, and renegotiation to fair market value at ten-year intervals thereafter. That structure exists because a lessee constructing a building needs a term long enough to amortize the cost, repay the lender, and earn a return. Shorter terms suit different situations. Bratton points to a current listing where an owner-user intends to sell and lease back, with a ten-year term on offer and flexibility to extend if that attracts the right investor. The building already exists, so the tenant is simply converting real estate equity into working capital for the business. The analytical question in every case is whether the returns are adequate for the risk the structure creates.
In multifamily, a Hawaii pattern runs counter to mainland expectations: scale does not always improve pricing. Multifamily is among the most desirable asset classes in the state because most investors understand it, which creates a deep buyer pool and compresses cap rates. That logic reverses at scale. A recently traded 23-unit building in town, in excellent condition, priced at about a five cap on a roughly $10 million basis. A 400-unit building that sold earlier this year traded at a considerably higher cap rate because a $200 million transaction has far fewer possible buyers. For investors operating in the middle of the market, the competitive advantage sits with the smaller check.
Cap rate comparisons across asset classes tell you less than they appear to because each class carries a different risk structure. A hotel reprices every night and depends on tourism volume and airlift. A building let to a creditworthy tenant on a 20-year leaseback with guaranteed monthly payment requires almost nothing of its owner. Those are different businesses, and the yields reflect it. Multifamily sits at the lower end of the range, office at the higher end, for reasons rooted in how investors perceive risk rather than in the buildings themselves.
The step Bratton returns to is the least technical and, in his account, the most frequently underweighted. "Go touch them, go feel them, go walk them," he says of buildings that look equivalent on paper. Access and egress, circulation, road conditions, how the site actually functions: these are the differences that separate two apparently identical assets, and they do not appear in an offering memorandum. Sight-unseen acquisitions still happen, though far less than in the 1980s, and most buyers now send a representative or arrange a video walkthrough at minimum. Bratton's position is that the visit repays the time because being on site surfaces details nothing else does. Having walked a building five years ago and again today is its own form of information, and it is the practical case for local representation over remote. For anyone pricing Hawaii assets, the composite lesson is that the spread between two similar buildings is rarely arbitrary. It is condition, tenure, scale, and what the walkthrough revealed.
The implications for investors are significant: overlooking these variables can lead to mispricing and missed opportunities. In a market where more than half of investors avoid leasehold entirely, understanding the nuances of ground leases, scale effects, and physical condition is essential. For the broader Hawaii commercial real estate market, this knowledge could mean the difference between a sound investment and a costly mistake.
