Office demand in the Honolulu market increased in 2012 from expansions related to various factors.<@SM>Office vacancy in Honolulu is down considerably from year-end 2011. *Chart courtesy of Hawaii Commercial Real Estate LLC

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HONOLULU-The local office market has registered its second straight quarter of occupancy growth, with gains in nine of the 10 submarkets tracked by a survey from Hawaii Commercial Real Estate LLC. The island-wide vacancy rate decreased nearly a full percentage point from 14.2% to 13.3%, with a range of 7.3% in Windward Oahu to 24% in Waikiki.

Average asking base rents decreased by 4 cents per square foot per month, while operating expenses increased by 3 cents per square foot per month. The resulting full-service gross rent decreased by 1 cent per square foot per month to $2.98 per square foot per month, and HCRE’s index of available spaces declined by 6.4% from 702 to 657 spaces across the island.

In addition, the market saw increased office demand in 2012 from expansions related to Honolulu’s rail project, alternative energy, mortgage and healthcare. HCRE expects increased demand from Obamacare-related ventures, mortgage and service companies benefiting from the rebound in tourism, construction and housing.

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The election of Kirk Caldwell as mayor of Honolulu and the FTA’s full funding agreement of Honolulu’s rail system virtually eliminate the risk of cancellation of the project and associated occupancy losses. Real-related office occupancy is close to its peak, and HCRE says in its market report, “We don’t expect much impact from rail until design and construction administration declines several years in the future.”

Unfortunately, the office market’s 132,000 square feet of positive absorption in 2012 is expected to be nearly offset by about 130,000 square feet of impending downsizing in 2013, much of it from leases signed in 2012 that take effect this year. These include several large tenants that are moving and downsizing, including Goodsill Anderson Quinn & Stifel and Bays Lung Rose & Homa, which are moving from Alii Place to First Hawaiian Center and Topa, respectively; BAE, which is moving from First Hawaiian Center and Clifford Center to Davies Pacific Center; and tenants that are downsizing in place including Deloitte at Bishop Place and Farmers at Waterfront Plaza.

HCRE states, “We expect that tenants will continue their relentless drive to lease fewer square feet per employee by using more open space, smaller offices, shared work stations, flexible work schedules and telecommuting.”

Risks to the market include potential negative impact of the loss of Senator Inouye, along with the potential negative effects of Congressional spending cuts, especially defense-related reductions. In the longer run, loss of government tenancy is a risk to private landlords since there is well over 100,000 square feet of federal tenancy in downtown’s high-rises that will eventually move back to federally owned facilities, and the state is looking at redeveloping the 50,000-square-foot Princess Kamamalu Building.

As GlobeSt.com previously reported, the Howard Hughes Corp. plans to renovate the IBM building, a well-known office building located along Ala Moana Blvd. in the heart of Kaka‘ako. As the next step in realizing its vision transforming Ward Centers into Ward Village, a vibrant urban master-planned community, the developer is making a substantial investment in the renovation of the building.

Is your area following the trends of office demand in Honolulu? Share your thoughts and observations in the box below.