The vacancy rate in office space on Oahu has increased to 8.6 percent and is expected to continue softening as unemployment and the economy worsen, according to a year-end report from commercial real estate firm Colliers Monroe Friedlander.

The office vacancy rate, which hit a decade low of 6.5 percent in mid-2007, has risen as firms related to real estate, construction, tourism and retailing downsized or closed their offices, said Mike Hamasu, Colliers' consulting and research director.

And, while full service gross rents have increased for the sixth consecutive year to $2.84 a square foot, the average net rent fell slightly to $1.70 a square foot indicating that all the rental rate growth over the past year was due to the 7 to 9 percent rise in building operating expenses, Hamasu said in the report.

“;Currently, businesses are full of apprehension and anxiety and thus, a quick rebound from the recession is not anticipated for the coming year,”; he said.

More than 900,000 square feet of office projects had been planned for Kapolei; however, downward trends in the economy and job growth will likely cause most of them to be shelved or sold, the report said. Only one small phase of Avalon Development's Kapolei Pacific Center is still under way.

Waikiki, which posted a 13.48 percent vacancy rate - the highest on Oahu at year's end - has been particularly vulnerable to the downturn, the report said. If the travel sector continues to slump, office buildings in Waikiki will be impacted.

Colliers has forecast that the recession will subside by mid-year 2009 and that next year's ending vacancy rate will fall between 9.5 and 10 percent, the point where landlords and tenants have equal negotiating power.

“;Landlord concessions, which had been reduced to extremely low levels over the past few years, are re-emerging in lease negotiations,”; Hamasu said. “;Tenant improvement allowances and free rent levels are anticipated to increase during 2009.”;

As vacancy rates continue to creep up and tenants continue looking for their best economic situation, many owners will be forced to reduce their asking base rents, Jeff Shinagawa, vice president of Colliers' Property Management Division, said in the report.

“;This will result in lower returns and expectations for asset performance,”; Shinagawa said.