The use of grep is redundant, sed can do the same. The problem is in the use of * that match also 0 spaces, you have to use \+ instead:

iostat | sed -n '/hdisk1/s/ \+/ /gp'

If your sed do not supports \+ metachar, then do

iostat | sed -n '/hdisk1/s/  */ /gp'

The use of grep is redundant, sed can do the same. The problem is in the use of * which also match 0 spaces. With GNU sed, you may use \+ instead:

iostat | sed -n '/hdisk1/s/ \+/ /gp'

Or, with standard sed:

iostat | sed -e '/hdisk/!d' -e 's/ \{2,\}/ /g'

to delete all lines that does not contain the substring hdisk, and to replace all runs of two or more spaces with single spaces, or

iostat | sed -e '/hdisk1/!d' -e 's/   */ /g'