Office vacancies
growing in Honolulu

The pressure has yet to result
in lower rents, according to agents

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By Russ Lynch
rlynch@starbulletin.com

Office-space vacancy in Honolulu is on the rise but there are still not enough empty spaces to cause a decline in rents, according to a new report from a leading commercial real estate firm, Grubb & Ellis/CBI Inc.

The overall office vacancy rate is approaching 14 percent and is fractionally higher among the best downtown office buildings than it is elsewhere, the report says.

It might go higher soon, with the possibility of three floors of Alii Place being vacated, but recently named exclusive listing agent Grubb & Ellis said top-class space like that won't stay vacant for long. And the tenant, who the company declined to name, may not leave at all.

"I think it would be picked up quickly," said Jeff Nasrallah, Grubb & Ellis research services manager, who prepares his company's quarterly reports. That building has had occupancy above 95 percent for 10 years and that won't change because prestige buildings can still attract tenants, said Matt Bittick, managing director of the Grubb & Ellis office services group.

Overall, Honolulu's office vacancy rate has been rising about half a percentage point in each of the last four quarters to approach levels last seen in the early 1990s.

In the mid-1990s, with businesses doing well and some new buildings not yet open, the vacancy rate fell but it is now rising again, Nasrallah said. "This is a market where vacancies are going up," he said, but much less than what is happening across the nation.

"The U.S. average has gone up 1 percentage point each quarter" for the last five quarters and is now a little more than 16 percent, Nasrallah said.

Businesses are moving into Honolulu leased space slower than space is becoming available as tenants leave, according to the second-quarter office market trends report by Grubb & Ellis. Office space in "Class A," the best buildings in the downtown financial district, was 14.1 percent vacant in the second quarter, Nasrallah's report said. But the change was due to a few large moves rather than an overall trend. The closure of film animation pioneer Square USA, which occupied four floors of Harbor Court, was the largest.

The change "does not fairly represent the strength of Hawaii businesses and is the result of both unusual circumstances and financial hardships among a handful of companies," Nasrallah said. A number of businesses folded or moved out in the first quarter of the year, opening up space that has not been filled, the report said.

Several business moved into commercial space in the second quarter. Hawaii Home Loans leased about 10,000 square feet on the 17th floor of the City Financial Tower, developed for City Bank. Ko Olina Developers leased 6,000 square feet in Harbor Court. Atlas Insurance vacated 21,000 square feet in Union Plaza but did not disappear, moving instead into 1132 Bishop St.

Despite the changes, the rents that building operators are asking have remained stable. In the second quarter of this year the top office space, called "central business district Class A," had an asking price of $2.29 a square foot. "As of 1997, as far back as my data goes, downtown Class A was at $2.34," the researcher said.

Still, the Honolulu market isn't rosy.

"The outlook for the office market remains bleak for the next two quarters," the report said. Grubb & Ellis is predicting an overall vacancy rate for all classes of Oahu office space averaging more than 14 percent by the end of this year, from 13.8 percent in the just completed second quarter.