Office space crunch expected to worsen
Oahu's office vacancy rate has fallen to its lowest level since 1991, and the space crunch is expected to worsen.
The island's office vacancy has significantly dropped from 13.75 percent in 2002 to the current rate of 6.5 percent and is expected to fall to 5.7 percent in the next year, according to a mid-year office market report released today by Colliers Monroe Friedlander Inc.
OFFICE VACANCIES SHRINKING ON OAHU
Mid-year rates on Oahu
2006 -- 7.7 percent
2007 -- 6.5 percent
2008* -- 5.7 percent
Source: Colliers Monroe Friedlander
In 1991, the office vacancy rate was at a historical low of 2.34 percent.
"The pace of growth has peaked, but it's still growing and vacancy rates are going to continue to head south," said Mike Hamasu, Colliers director of consulting and research. "Tenants are going to find it even more difficult to find space and landlords are more likely to increase rents."
Since 1999, Oahu's average asking rent rose nearly 28 percent from $2.08 to $2.66 per square foot a month. Base rents have jumped 12.75 percent in the past 18 months, according to the report.
Meanwhile, nearly 19,000 office jobs were added to the market as Hawaii's economy began to flourish starting in 1999.
The number of office workers grew from 80,000 in 1999 to more than 99,000 this year, resulting in nearly 1.1 million square feet of growth in the office market over the past eight years.
"We've got to figure out whether or not the market can sustain the growth that it's experiencing," Hamasu said.
While there is more available space for smaller tenants, which typically lease between 1,500- to 4,000-square-foot offices, space is much tighter for larger companies that need blocks of more than 7,000 square feet, he added.
The problem is likely to worsen, particularly in urban Honolulu, where there are no new office buildings expected to be built because of the rapid growth of construction costs and significant appreciation in commercial land values.
"Both factors hamper the financial feasibility of new office development," the report said. "With office supply constrained, rents continue to move upward quickly, but still are not high enough to justify new high-rise office construction."
Most new office projects on the books are planned for Kapolei, though pricing for office space is in excess of $3 per square foot.
Meanwhile, base rents in Leeward and East Oahu have risen to more than $2 per square foot a month.
The result of escalating office rents and the continued high demand for space has attracted mainland investors, who have purchased more than 2.7 million square feet, or 18 percent of Oahu's total office buildings, since 2002.