Honolulu office rents to keep rising while vacancy declines

Oahu's office vacancy rate dropped to 7 percent at the end of 2006, its lowest year-end level since 1991, according to a report by commercial real estate firm Colliers Monroe Friedlander.

What became a landlord's market about a year and a half ago, when vacancies dipped below 10 percent, has tipped even further in the landlord's favor.

And since no new offices are expected in downtown Honolulu in the next few years, Colliers predicts vacancy rates will continue falling, resulting in a 6 percent to 6.5 percent vacancy rate at the end of this year.

The islandwide vacancy rate stood at 7.7 percent at mid-year 2006, and 8.6 percent at year-end 2005.

Much of the driving force behind the lower vacancy rate is strong leasing activity in Honolulu's central business district, the report said.

"It's a continuation of probably the strongest period of growth in the office sector in the last 15 years," said Mike Hamasu, Colliers' research director. "What it demonstrates is that the economy has been really healthy, with job growth as a result of that."

Islandwide full-service asking rents averaged $2.59 per square foot per month at year-end 2006 compared to $2.36 at year-end 2005, according to Colliers.

On top of that, operating expenses went up nearly 9 percent, according to the PM Realty Group, and are expected to increase by another nine percent this year.

"The three main drivers are your insurance, real property taxes and electricity," said Jeff Nasrallah, project manager at PM Realty. "Those were the main drivers during 2006, and will again be the drivers in 2007."

Tenants, for now, may be stuck with the higher price tab because of the prohibitive cost of building new office space, which tops $75 per square foot, according to Colliers.

PM Realty Group, meanwhile, placed the vacancy rate for the central business district and Kapiolani corridor at 6.7 percent. Landlords are gaining more power in their ability to control rents, according to Nasrallah, because of the constraint in supply.

And expect parking rates, which average $283 per month in the central business district, to go up another 8 percent to 12 percent this year.

For 2007, Colliers expects a slowdown in the pace of new leases, as well as a moderating economy and tight labor market.