Stagnant vacancies
still best mainland

Office landlords are more willing
to deal, according to brokers

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By Russ Lynch
rlynch@starbulletin.com

Downtown Honolulu landlords are offering deals to attract tenants, with vacancy rates running higher than they have been since 2000. Months of free rent and gratis building improvements are typical, commercial real estate agents say.

However, a new study shows that Honolulu's commercial real estate business weathered economic downturns much better than mainland areas, although the office vacancy rate is not likely to improve much until at least late 2003.

"In the larger transactions, landlords are willing to bend over backwards in order to retain tenants or get them," said Kyle Arsiga, a commercial real estate associate at Grubb & Ellis/CBI Inc.

"The people who are looking for space are becoming educated," he said. One direction they are looking is to sublease space no longer needed by major building tenants whose businesses are downsizing.

"In the last couple of months there has been so much press about vacancies downtown and landlords competing for tenants" that would-be tenants have become a lot sharper, Arsiga said.

Mainland cities hurting

But his company's research director, Jeff Nasrallah, this week produced a report showing that vacancy rates are worse on the mainland while the latest upswing in Oahu office vacancies is flattening.

"The U.S. office and industrial vacancy rate increased at a rate 900 percent faster than Oahu's" since the first quarter of 2001, Nasrallah's report says.

The national office vacancy rate was 10.4 percent in the first quarter of last year and is now just above 16 percent, the report says.

Oahu's office vacancy rate was at 12.7 percent in the first part of 2001, stayed flat at 13 percent through 2001 and has risen to 13.8 percent.

The numbers do not include commercial warehouse facilities, which have a lower vacancy rate than office space.

Pressure on rents

Nasrallah's report says that there is no significant construction in the works in the Honolulu office market and that overall employment is expected to grow 1.3 percent to 2 percent a year, according to state estimates.

"For the remainder of the year, landlords of office buildings can expect continued increasing vacancies and effective rental rates will experience downward pressure," the report says.

Average asking rental rates for office space on Oahu have hovered around $2.17 a square foot since the first quarter of 2001, the report says. That is a gross-rental figure, including a variety of fees and other costs a tenant must pay.

Frances Okazaki, a commercial real estate broker at CB Richard Ellis Hawaii Inc., said she doesn't see Oahu rents changing much. "They're going to be fairly flat," said Okazaki. CB Richard Ellis is not related to Grubb & Ellis.

"Obviously the building with the greatest vacancy is going to be compromising on rates," she said.

Much of the movement in the Hawaii market involves tenants leaving one building for another. The changes don't alter the overall Honolulu vacancy level, but can severely impact individual properties.

"You're not having new companies occupying new space," she said.

Okazaki is optimistic about the Honolulu market, despite the rising vacancy rate.

"If you're looking at the kind of vacancy at the national level, you see 25 percent in some areas," she said.

There are some buildings where occupancy percentage is in the high 90s.

"It would be unreasonable for a tenant to say 'I want six months of free rent,'" Okazaki said. "And yet there are buildings with vacancies that the landlords want to fill."

Matthew Bittick, managing director for Grubb & Ellis, said a recent report indicated that on the mainland, 24 percent of the direct-leased office space is being offered for sublease. But in Honolulu, major tenants are only offering 7.2 percent of their space for sublease.

"I don't think it is going to get nearly as bad as it has on the mainland," Bittick said. In fact, the Honolulu commercial market hasn't really changed much in six years, he said.

Mike Hamasu, director of consulting and research for Colliers Monroe Friedlander, a Hawaii competitor for Grubb & Ellis, agreed with Nasrallah's overall findings.

Job growth needed

Office space demand depends on employment and there hasn't been much job growth, he said. "Although it is slow growth, there is going to be (jobs) growth by midyear 2003," Hamasu said.

While commercial leasing has been slow or down, there has been a big increase in Honolulu office leasing by government and by educational, medical and nonprofit institutions, he said.

Ordinary commercial office use has shown a decline. "The biggest office users -- lawyers, accountants, bankers, insurance, technical and travel -- all show a decrease," Hamasu said.

Demand will show "low growth, slow growth, maybe no growth, maybe negative," he said. "Hawaii has been in a stagnated economy the last 10 years."

Technology companies brought a boom in lease activity in the first half of 2000 but that demand has steadily slid, he said.

"I don't think anybody knows what is going to happen," said John Lyles, president of American Land Co. "The truth is, not much has happened."