Retail Real Estate Vacancy Risk Looms for Oahu Property Owners

The outlook for Hawaii's commercial real estate sectors in 2026 is marked by divergence. While the office market demonstrates resilience with a steady 12% vacancy rate, outperforming many mainland counterparts, the retail segment is facing increasing headwinds. Major retailers are reportedly reconsidering their footprints in the islands, signaling a potential increase in vacancy rates and downward pressure on rental income for property owners. This uncertainty necessitates a proactive approach to leasing and portfolio management.

Who's Affected

• Real Estate Owners:

  • Properties heavily reliant on anchor retail tenants may experience significant vacancies if leases are not renewed or if major retailers downsize.
  • Expect increased negotiation pressure from existing tenants seeking reduced rates or more flexible terms. A significant increase in vacancy could require substantial investment in marketing and tenant improvements to attract new businesses, potentially impacting cash flow.
  • Development projects focused on retail may face slower absorption rates and higher pre-leasing risks.

• Investors:

  • Portfolios with substantial exposure to retail real estate in Hawaii should be under heightened scrutiny. Declining lease revenue can directly impact property valuations and debt service coverage ratios.
  • Consideration should be given to the risk premium associated with retail investments versus more stable sectors like office or industrial.
  • New investment opportunities may arise if distressed assets become available, but thorough due diligence on tenant mix and lease structures will be critical.

• Small Business Operators:

  • Retailers with expiring leases may find themselves in a stronger negotiating position, potentially securing more favorable rental rates or lease terms.
  • Downturns in larger retail spaces could lead to opportunities for smaller businesses to occupy prime locations or for creative repurposing of underutilized retail square footage into mixed-use spaces.
  • Suppliers to the retail sector might experience fluctuating demand based on retailer consolidation or expansion.

Second-Order Effects

A sustained increase in retail vacancy could lead to reduced foot traffic in shopping centers, negatively impacting non-retail businesses located within those centers. This, in turn, could decrease demand for local services and potentially slow job growth in the retail and associated service sectors. Furthermore, underutilized commercial properties could eventually impact local tax revenues if their assessed values decline significantly. The ripple effect could also pressure ancillary services such as property maintenance, security, and cleaning companies that rely on commercial leases.

What to Do

For Real Estate Owners:

• Monitor lease expirations closely Identify tenants whose leases are up for renewal in the next 12-24 months, especially major national or regional chains.
• Proactively engage with key tenants: Initiate conversations about renewal terms early, understanding their strategic plans and potential needs.
• Diversify tenant mix: If possible, seek to attract a wider variety of businesses to mitigate reliance on a few large anchors. Consider converting vacant spaces to other uses if zoning permits.

For Investors:

• Review retail portfolio exposure: Quantify the percentage of your portfolio invested in Hawaii retail properties and assess the lease maturity profile.
• Stress-test your assets: Model scenarios with increased vacancy rates and stress-test debt obligations.
• Explore value-add opportunities: Identify properties with potential for repositioning or alternative uses.

For Small Business Operators:

• Assess current lease terms: If your lease is coming up for renewal, be prepared to negotiate based on current market conditions.
• Explore expansion opportunities: Keep an eye on spaces that may become available due to retailer downsizing, particularly in desirable locations.

Action Details: "Watch for any official announcements from major retailers regarding their Hawaii operational strategies or lease terminations. Monitor commercial real estate vacancy reports from organizations like CCIM and IREM Hawaii monthly. If retail vacancy rates on Oahu exceed 15% for two consecutive quarters, or if a major anchor tenant vacates a significant property, then Real Estate Owners should prepare for aggressive lease negotiation or begin planning for tenant mix diversification and potential repurposing of space.