Downtown real estate
The downtown office real estate business is picking up, with vacancies falling.
Just how much empty space is being grabbed is a matter of contention among commercial real estate experts, but they agree vacancy numbers are down, possibly as low as they were at the end of 2002.
The office tower in the Harbor Court complex, above, has the worst unrented space among the best-quality buildings at 44 percent vacancy, but interest is growing for the site.
The rosiest picture comes from Jamie Brown, president and founder of Hawaii Commercial Real Estate, who said his studies of occupancy changes show that top-class lease and sublease office space in downtown Honolulu is 13.9 percent vacant.
That is a considerable move-in from a 15.9 percent vacancy level in the second quarter of this year and close to the 14 percent level of year-end 2002.
Other real estate researchers would not go as far as Brown's two-point drop in the third quarter, but agreed that downtown Class A vacancies, meaning the best-quality buildings, could be down by one percentage point.
That is still a long way from the vacancy levels of about 11 percent at the end of 2000, but it is an improvement over recent quarters and commercial real estate agents say there is a definite upturn in business interest in leasing space.
Brown called his survey results "exciting news" and said the overall office vacancy rate in Honolulu had taken a significant drop since June 30, reversing a negative trend that began with the disasters of Sept. 11, 2001.
Vacancies in downtown office buildings declined by 96,000 square feet in this quarter, Brown said.
Even if buildings with an uncertain status are taken out of the equation, the positive move would not change, Brown said. For example, he did not count as "vacant" or "not vacant" the building at 1100 Alakea St. recently acquired by Alexander & Baldwin Inc.
That's 177,000 square feet of office space, at least half empty, but A&B is converting it from commercial rental space to a business condominium. The units will be for sale, not for rent, but the buyers might lease them out, Brown said.
Central business district vacancies were reduced because of such moves as Aloha Airlines leaving space in Mapunapuna and taking extra space above its headquarters in Building Two of Waterfront Plaza, the commercial space behind Restaurant Row. Part of the reason was a move from a Mapunapuna building that was acquired by Kaiser Permanente, which decided to use all the space for its health-care operations.
Aloha said it has been moving into space on two other floors because the airline is growing its staff and consolidating functions closer to head office.
Jeff Nasrallah, director of research at Grubb & Ellis/CBI Inc., did not agree with Brown's numbers but he agreed with the trend. "There is no chance for that to take place," Nasrallah said of Brown's two-point vacancy drop.
At most, the decline might be one point but, even so, "this is the first actual, real positive sign in probably the last four to six quarters," Nasrallah said.
Mike Hamasu, director of consulting research at competitor Colliers, Monroe & Friedlander, agreed there has been some "positive absorption," meaning tenants have moved into vacant space.
He still sees the central business district vacancy rate as just above 16 percent, but says that is an improvement.
Different people classify buildings in different ways, he said, but like Nasrallah, he sees about a one-point drop on vacancy this year, from what he estimated as a 17.3 percent vacancy level at mid-year.
One of the worst-occupancy examples mentioned by Brown and others is the office tower in the luxury Harbor Court complex on the Honolulu waterfront.
Brown identified that office space as 44 percent vacant, the highest unrented space among the Class A buildings that range up to only 5.3 percent unleased in the First Hawaiian Center.
Even there, interest is growing, said Kalani Schrader, senior vice president of CB Richard Ellis Hawaii, leasing agent for the commercial space, who agreed with Brown's vacancy estimate for the building.
"We're seeing quite a bit of new leasing momentum for the project," because of its excellent views and its convenient downtown location, Schrader said. The biggest sales point is that the owners are willing to make deals to make a move-in more attractive, he said.
Hawaii Commercial Real Estate's Brown sees some positive changes in the economy that could lead to a demand for office space, such as Norwegian Cruise Line's expansion of its Hawaii-based business and the upcoming military housing contracts. Those things bring in businesses, which in turn need space, his theory goes.
Others are not yet convinced. "There's movement, but not a lot" and there are still companies that could cut back on staff and need less space, said Andy Friedlander, chief executive and principal broker of Colliers Monroe Friedlander.
Office space in Waterfront Plaza, which his company represents, is 96 percent occupied and the attached Restaurant Row is in negotiations with some potential new tenants, he said.
Friedlander's view of the market is that there are businesses whose leases are running out in the next year or so and "people are always looking, especially if they smell good deals."
That is spurring some of the renewed interest in office space, but there is enough space around to create enough competition that allows tenants some bargaining room in renegotiating deals for the space they now occupy, Friedlander said.