Office rents likely
to stay flat for 2003

The vacancy rate for office space
should remain steady this year

By Russ Lynch

Many Honolulu offices will remain unrented for at least the next few months, keeping rents in check, according to Honolulu commercial real estate experts.

While the downtown central business district ended 2002 with a vacancy rate below 13 percent, Waikiki fared worse, with a 16 percent-plus vacancy level, according to a new report by Jeff Nasrallah, research services manager of Grubb & Ellis/CBI Inc. The overall Oahu office vacancy rate remained steady at 14 percent and is likely to rise to between 14.2 percent and 14.4 percent through the first half of 2003, Nasrallah's report said.

"Average asking rents will remain flat to modest decreases within most submarkets," while the central business district may see declines of 1 percent to 1.5 percent in the rent landlords ask for, Nasrallah said.

Mike Hamasu, research chief at Colliers Monroe Friedlander Inc., generally agrees with Nasrallah in his preliminary year-end office real estate report.

Nasrallah said the overall Oahu office vacancy rate rose in 2002 to 13.6 percent from 12.7 percent. Hamasu predicts that rents asked for won't change much this year, if at all, and any increases will be because of the higher cost of operating business, not because of space demands.

However, Hamasu believes office vacancy levels will rise through 2003, to reach 14 percent or 14.5 percent but space will start to fill late in the year. He predicts an Oahu office vacancy level of around 13 percent by 2005.

Both companies issued their reports for 2002 and projections for 2003 yesterday.

Joseph T. Haas, senior associate at CB Richard Ellis, said the Honolulu office-space vacancy level peaked at 19 percent in November 1996 but the central business district vacancy level dropped to 11 percent by mid-2001.

At that time, however, the full effects of the Sept. 11, 2001, attacks had not been felt, Haas said. Then Internet companies and telecommunications businesses failed and the downtown office market lost more than 3 percent of its tenancy.

Haas predicts better times, however.

"By the middle of 2002 the office market seemed to hit bottom and began to recover back to pre-9/11 levels," Haas told a meeting this morning of the Honolulu branch of the National Association of Industrial and Office Properties.

Haas also expects office rents to remain flat overall through 2003, but said low-end rents have risen while those in the most desired buildings have remained flat. All this adds up to a good time for office tenants, Haas said.

"Rents are low and landlords are making excellent deals," Haas said.

He said it is also a good time to buy because the bear market in stocks and the very low interest rates have made real estate investments more desirable. Haas said he expects some major commercial real estate sales to take place in 2003. When CB Richard Ellis listed the Koko Marina shopping center in Hawaii Kai for sale there were 70 calls from qualified buyers in the first week, Haas said.

"Buyers competing for properties will push prices up and, therefore, we predict we will have more properties offered for sale," Haas said. He said demand for retail space is so strong new shopping centers will be developed and the developers will be able to charge more than enough in rents to cover the construction cost.

A speaker from one of the leading sources of investment capital agreed. Xavier Schied, New York-based senior vice president of the Lehman Brothers global commercial real estate finance group, told NAIOP that Lehman came into the Hawaii market in 1995 "because it appeared to be significantly underdeveloped" and there are still opportunities to invest.

In the past seven years Lehman Brothers has invested $200 million in Hawaii, backing such projects as the 2100 Kalakaua retail complex, King Kamehameha Plaza and Restaurant Row, he said.

Capital is available for commercial real estate in Hawaii, Schied said, but he cautioned that investors now want a quick turnaround. Lehman, for instance, wants to get its money back in two years so is not interested in long-term resort development, he said.

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