Okazaki

The first half of 2003 brought variation to the absorption and vacancy measurements of Hawaii’s office sector depending on the specific submarket and the typical tenants that area attracts. Honolulu’s central business district continued the trend of negative absorption and increased vacancy while the West Central and Kapiolani/Kakaako submarkets showed more positive signs.

The greatest factor in the negative absorption rate in the CBD marketplace is the increase in vacant sublease space. Never has so much sublease space been available in downtown Honolulu. The 170,000 square feet of available sublease space accounts for more than 3 percent of the total office market. Eleven vacant floors of such space coupled with direct lease offerings have created challenges for owners not wanting to subdivide floors and invest in the construction of new lobby corridors.

Without any migration to Hawaii by large office renters, a few sizable tenants already in the marketplace have been presented with opportunities to relocate that are not typically available in a tight market. In the past year, no major tenant has absorbed a significant amount of office space nor has any new tenant of substantial size come to the islands.

“Most of the larger tenants in Hawaii are continuing to right-size and have therefore shed more space than they’ve absorbed,” says Frances Okazaki, director of CB Richard Ellis Hawaii, Inc.

There have been no significant leases signed in the downtown Honolulu area in 2003. For the last significant office contract, one must go back to the close of 2002 when 24,000 square feet of space was leased in Pioneer Plaza, located at 900 Fort St. More notable this year is a pending sublease contract for 35,000 square feet of office space in First Hawaiian Bank Center at 999 Bishop St.

The growth and expansion of user groups involved in construction, residential development and financial services, like mortgage lending, have contributed to the positive absorption rate in the West Central and Kapiolani/ Kakaako submarkets. Tenants connected to increases in government spending on military and homeland security contracts have also contributed to the positive trend in this area.

True Class A office buildings can be found only in downtown Honolulu. Given the smaller office market in Hawaii, the Kapiolani and Waikiki submarkets are typically included in this office classification. Average rental rates for Class A office buildings in the state range from $2.15 to $2.36 per square foot per month. Operating expenses average about 91 cents per square foot per month. Gross rental rates range from $2.11 to a high of $2.64 depending on the submarket with operating expenses ranging from 85 cents to $1.01.

Second quarter vacancy rates for office buildings in Hawaii ranged from 18.2 percent in Waikiki to zero percent in West Oahu. Honolulu’s CBD registered a 15.5 percent vacancy rate while the Kapiolani submarket came in at 11.9 percent.

Office owners feeling the pinch can take heart in some positive indicators. In the last 3 years, Hawaii’s economy has grown at a 3.5 percent rate compared to the U.S. economy’s 1 percent annual growth rate in that timeframe. In addition, the Aloha State leads the nation with the lowest unemployment rate — less than 4 percent. The good news doesn’t end there.

“The downtown CBD office market will be the one to watch over the balance of the year,” Okazaki says. “While absorption has been negative for the past two quarters it appears that the downtown CBD market has bottomed out. Rental rates remain flat with the vacancy rate at 15.5 percent. There is sufficient space in various buildings for tenants to find alternatives giving them more leverage in negotiations with landlords. It is a balanced market where landlords can be competitive, if they want to, with selective tenants.”

According to Okazaki, the main reason to focus on this submarket is the transformation of a 160,000-square-foot Class A office building into a corporate office condominium property. The tower, known as 1100 Alakea, was purchased in March by A&B Properties when it was 60 percent vacant. Each of its 31 floors will be offered for sale as fee simple commercial condominium apartment units with some of the floors divisible into two units. The floors are approximately 5,500 square feet and are being offered below replacement cost or in the affordable range of $500,000 to $1.6 million.

“With low interest rates and a lack of small, quality investments in Hawaii, this provides an excellent venue for the owner-occupant small business needing half a floor, or a larger business taking multiple floors or an investor holding on for the upside in the office market,” Okazaki says. “It will be interesting to see how this affects the downtown CBD.”

While parts of the Hawaii office market show promise, others, like the state’s office development business, continue to drag. Rather than build new offices, developers have chosen to use available real estate for multifamily and condominium projects.

“Of all the market sectors, the [new] office market continues to be the softest,” says Okazaki, who points to the retail and residential sectors as the busiest areas of development. “The last new construction was completed almost 10 years ago in 1994.”

In what amounts to significant news in a down market, the historic post office in downtown Honolulu has been sold by the General Services Administration to a private developer. Once renovated, the post office will be divided into condominium space allowing various state government agencies to relocate there while their state-owned office buildings are renovated for other agencies to occupy. The Department of Commerce Consumer Affairs in Hawaii will control the rest of the building as a separate condominium.

©2003 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.