Tenants scramble for office space
No significant new space will be developed for at least three years
Spooked office tenants, worried that tightening market conditions could push rents upward by 45 to 90 percent in the next two years, are scurrying to take up all available space in the market, according to a new report from commercial real estate firm PM Realty.
"We tend to believe the office market cannot absorb office space at a rate greater than employment demand. However, this is not the truth," said Matthew Bittick, a vice president with PM Realty, who has represented more than 4.5 million square-feet of office transactions for the company.
Market conditions, which are at their tightest since the 1990s, have resulted in a "bunk desk" situation, where employers over-lease space to ensure that they can house future staff, Bittick said.
There is a Chicken Little mentality beginning among Honolulu employers, many of whom have started to adopt the attitude that they should get space while the getting is good. Many who are over-leasing believe that strong demand in the office market, coupled with limited supply, will likely result in rent increases ranging from 15 to 30 percent annually, Bittick said.
"No significant office construction is slated for delivery within the next 3 years to relieve the supply crunch, thus creating a competitive environment where tenants will soon bid fiercely to satisfy their real estate requirements," he said.
Developers will not seriously consider building more space until asking rents, which are currently around $2.60 to $2.75 per square foot approach the $4.50 threshold, Bittick said.
As a result, Honolulu's largest tenants are at a distinct disadvantage in this marketplace, and can expect to pay premiums for any block of space larger than 10,000 square feet, he said. By 2008, the availability of full-floor office suites is forecast to be entirely depleted, Bittick said.
"For the first time in more than 15 years, this market will experience an anomaly where full-floor tenants will effectively have weaker negotiating positions than smaller tenants," he said.