Oahu office space
tightens, rents to rise
Oahu office space is becoming harder to find, while rents so far remain stable, according to a new research report by the local office of commercial real estate firm CB Richard Ellis.
Business optimism and job growth has shrunk the islandwide measure of available space to 12.2 percent in the fourth quarter, a decrease from 14.2 percent a year earlier. Oahu tenants leased 221,072 square feet in 2003, compared to a negative 48,308 square feet last year, said Jeffrey Hall, local senior director of research at CBRE.
"Not since 1997 has absorption been in the positive six figures," Hall said, adding that while rents are currently stable, rising demand coupled with a decline in the amount of available space is likely to drive up costs for renters.
On average, Oahu asking rents for office space are running from $2.07 to $2.26 per square foot per month, just slightly below the $2.09 to $2.26 asking price a year ago. However, some office buildings had rate increases, depending on their location and the higher cost of services and tenant improvements.
Honolulu office-space vacancy peaked at 19 percent in November 1996, but the central business district vacancy level dropped to 11 percent by mid-2001, according to data released by CBRE.
Although the overall picture for Oahu commercial real estate is looking healthy, industry experts don't expect the market to continue at the break-neck pace established during the past six months, said Mike Hamasu, a commercial real estate analyst with Colliers Monroe Friedlander. The company released a biannual report in December that pegged vacancy at 11.8 percent, he said.
Rents are going to increase as demand for available space strengthens, but it's going to be a gradual rise, Hamasu said, adding that developers are not going to rush to build new office space until rental rates go for more than $3 a square foot.
"Rents will be fairly stable and you won't see any steep rises for at least the next year," Hamasu said. "Although, we'll likely see more demand in Kapolei, Pearl City and Aiea."
From Pearl City to Kapolei, new communities have developed, spawning demand for offices in the area, Hamasu said.
Military businesses that feed off Pearl Harbor and Iroquois Point also are creating activity in the area, he said.
The West Central, Leeward and Windward submarkets showed positive gains as people moving into those areas have created more demand for space, Hall said.
Absorption in West Central outpaced the higher-profile downtown area, Hall said.
West Central leased 63,024 square feet of office space out of 1.5 million available square feet, while the downtown district, with 5.1 million available square feet, only showed 61,077 square feet of absorption.
"This was a very big boom for West Central," Hall said.
In the downtown business district, the amount of available office space fell about 5 percent to 13 percent availability from 13.7 percent a year ago. That figure refers to space that is on the market but may or may not be occupied by tenants.
Hall identified a change in the office business, a shift to owning an office rather than leasing.
The conversion of Alakea Corporate Tower and Queen's Court into office condominiums resulted in positive absorption downtown, but also means those properties are off the market and not likely to result in more absorption for the coming year. Queen's Court sold out almost immediately and Alakea Corporate Tower has been selling fast since Alexander & Baldwin Inc. put the office condominiums up for sale in last fall, Hall said.
The trend could be pursued by more businesses looking for stable costs over the long run, but individual businesses will still have to evaluate the pros and cons of renting versus buying space, Hamasu said.
"The fact that a number of office condos have sold fast might be an indication of how strong this market is," Hamasu said. "However, it might not be a good decision for those in rapid growth industries who might require more flexibility in terms of space."
If the popularity of converting office buildings into condos increases, it could further drive up rents by decreasing the amount of available rental space in the market, Hall said.
No new office buildings are under construction, he added.