State office market sees decrease in vacancies
POSTED: Tuesday, December 16, 2008
The islandwide office market saw a sharp increase in vacancies during the third quarter of this year and asking base rents decreased, according to the latest Honolulu Office Market Report from Hawaii Commercial Real Estate LLC.
» When: Third quarter 2008
» Availability: 8.7 percent
» Full service gross rent (base rent plus operating expenses) : $3.08 to $3.13
» Absorption: 18,373 square feet
Source: Hawaii Commercial Real Estate LLC
Hawaii Commercial Real Estate placed the islandwide office vacancy rate - or third-quarter availability - at 8.7 percent. At the end of the second quarter, the availability was at 8 percent.
While asking rents rose from $3.05 to $3.12 per square foot, operating expenses increased by 9 cents a square foot. As a result, asking base rents have decreased by 2 cents a square foot and taking base rents have decreased by 5 cents to 10 cents a square foot.
"While tenants have seen their tenant rates going up, the landlords have not seen their base rents go up because operating costs are rising," said James M. Brown, president of Hawaii Commercial Real Estate. "The tenants think that their rents are going up, but the increase is mainly going toward rising electricity costs."
A continued slowdown in tenant demand is expected as the full impact of the global financial crisis affects Hawaii's already slowing economy, tourism, and the residential real estate market, Hawaii Commercial Real Estate reported. In addition, less office space has been needed due to a shortage of qualified office workers and a general trend toward putting workers in less space, the company said.
Yet, the falloff in tenant demand has not resulted in a precipitous drop in office leasing on Oahu, Brown said.
"The leasing activity is certainly down as evidenced by the vacancy numbers, but it's not as bad as you would think," Brown said. "Most tenants aren't coming to the end of their lease and closing their doors or cutting space. Some are expanding, but most are staying the same size or downsizing slightly."
However, the one bright spot for landlords remains the lack of new office space, Hawaii Commercial Real Estate reported. The last new office building was the First Hawaiian Center in 1996, and since there has been no new multi-tenant office space to compete with existing buildings, the company said.
Every Oahu submarket saw increased vacancy except for the Kapiolani corridor, which saw a mere 4,100 square feet of positive absorption (more people moving in than moving out).
Perhaps the most telling sign of these economically troubled times is the performance for Oahu's Central Business District, where class A buildings have now seen five straight quarters of negative absorption. Year to date, CBD absorption is a negative 78,000 square feet, which is more than all of 2007. The CBD was heavily impacted by the Aloha Airlines bankruptcy, HMSA's move out of downtown, the Department of Hawaiian Homelands' move to Kapolei, Norwegian Cruise Line's downsize and the closure and movement of several other high-profile businesses.
In Leeward Oahu, vacancy increased significantly when Castle & Cooke put about 19,000 square feet of space on the market in the Leilehua Building in Mililani Tech Park. In Waikiki, there are still significant vacancies in the Pacific Business News Building and the Waikiki Trade Center.
There are three major projects planned for Kapolei; however, two are on hold and one has been scaled back. It is unlikely that more new office space will be developed in the next few years, with the exception of medical office space.