WESTERN SNAPSHOT, FEBRUARY 2009

Honolulu Office Market

Brown

The slowdown in residential real estate and tourism, coupled with the global financial crisis, took a toll on Honolulu’s office market. However, compared to most mainland markets, the 0.8 percent increase in vacancy (72,249 square feet of negative absorption) seems small. Honolulu has not seen a new, multi-tenant office building since First Hawaiian Center was completed in 1996, and with rents still a fraction of those needed for new construction, nothing is in the development pipeline beyond a 135,000-square-foot medical building and a 33,000-square-foot retail/office project.

The Honolulu market closed 2008 at 9.2 percent vacancy with the 10 submarkets ranging in vacancy from a low of 3 percent in East Oahu to 15.4 percent in Waikiki. The central business district (CBD), which represents almost half of the market’s inventory, lost a full 1.1 percent of occupancy to end the year at 10.6 percent vacant. Seven of the 10 submarkets saw negative absorption with a disproportionate share occurring in the CBD. Bucking the trend, Kakaako and Kapiolani, located between downtown and Waikiki, both registered respectable gains in occupancy.

Full service gross rents increased from an average $2.85 per square foot per month to $3.05 per square foot, which included a $0.31 per square foot increase in operating expenses. As a result, the base rent (what landlords keep) actually declined by $0.11 per square foot. Parking rates increased marginally and range from no cost in a few suburbs to $250 per stall per month for CBD unreserved stalls. Tenant-improvement costs also increased marginally with Class A paint and carpet jobs running in the $10 to $15 per square foot range.

With market-wide vacancy approaching 10 percent and forecasts of a tough year for tourism and jobs, expect much more competition by landlords for tenants. As a result, some tenants will be able to negotiate lower increases in starting rental rates, lower annual increases (typically 3 to 4 percent), limited free base rent and in some cases moving allowances. Landlords will focus on tenant retention as not many new tenants will be entering the market, and building managers will focus on controlling operating expenses, especially energy-related costs.

This report tracks about 11.2 million square feet in Honolulu’s 73 Class A and B multi-tenant office buildings. Fifty percent of Oahu’s office space is located in Honolulu’s CBD, and Honolulu’s urban core, a 3.5-mile corridor from the CBD to Waikiki, accounts for approximately 82 percent of the island’s inventory. The 13 Class A buildings in the CBD account for approximately 4.8 million square feet or 43 percent of the island-wide inventory.

James Brown is president of Hawaii Commercial Real Estate LLC in Honolulu.

©2009 France Publications, Inc. Duplication or reproduction of this article not permitted without authorization from France Publications, Inc. For information on reprints of this article contact Barbara Sherer at (630) 554-6054.