HONOLULU-The Honolulu office market continued its occupancy slide in the third quarter with 30,127 square feet of negative absorption, according to a recent report from Hawaii Commercial Real Estate LLC. Eight of the last nine quarters have seen negative absorption, the report says.

Vacancy increased to 11.5%, 0.2% higher than the previous quarter and 1.2% higher than the same time in 2009, the report says. The island-wide average asking full service gross rent declined slightly during the quarter to $2.96 per square foot per month. Operating expenses, which are included in the gross rent figure, increased to $1.26 per square foot per month, according to the report, which means the asking base rent declined by $0.04 per square foot per month during the quarter. “The market continues to be a tenant’s market for those tenants that are willing to move,” says the report.

According to CB Richard Ellis’ third quarter Honolulu office report, while the economy as a whole continues to exhibit conflicting results on its path towards recovery, trends from the local Hawaii commercial sectors remain tempered by are generally encouraging. In the third quarter of 2010, the Honolulu office market yielded results that were mostly flat, with vacancy and availability rates seeing nominal changes coupled with the minimal negative absorption of 8,954 square feet, a number that is a slightly different from Hawaii Commercial’s findings.

According to CBRE numbers, the market’s vacancy rate remained unchanged at 12.2% and the total availability rate similarly only decreased nominally to 13.5%. The greatest third quarter gains in occupancy occurred in the West Honolulu submarket, according to CBRE, where 31,788 square feet of positive absorption was recorded.

CBRE numbers show asking rates at an average of $2.85 per square foot. And the report says it expects that average asking lease rates have reached something of a plateau that will be maintained for the remainder of 2010 as fundamentals continue to stabilize.

Like Hawaii Commercial Real Estate, CBRE’s report points out that “lease economics are still favoring the occupier side, and offers for tenant incentives such as free rent, remain commonplace.” The report continues that “Landlords continue to be focused on retaining tenants and maintaining occupancy levels rather than increasing lease rates to stabilize their assets.”

More Vacancy on the Horizon

With job growth forecast to be flat, and most businesses relentless about reducing costs including rent, we expect that vacancy will continue to increase for the next several quarters, says Hawaii Commercial Real Estate.

According to the report, space being vacated downtown in the fourth quarter includes: Morgan Stanley Smith Barney will vacate 20,000 square feet at Alii Place when they consolidate their operations at Pacific Guardian Center, Envision Networked Solutions will vacate about 10,000 square feet at 1000 Bishop as it consolidates its office and warehouse outside of downtown, Kiewit will vacate a floor at Harbor Court when it moves to Iwilei, KPMG will be downsizing by about 10,000 square feet, and a temporary film production company is vacating about 25,000 square feet at One South King Street.
Outside of downtown, Bank of Hawaii will be putting up to 40,000 square feet of space on the market in Kapolei, and DFS will be vacating about 35,000 square feet at Waikiki Trade Center in 2nd quarter of 2011. On a bright note, according to the report, several very small startup firms leased space at Pacific Guardian Center.

Many Options for Tenants

Hawaii Commercial Real Estate’s index of available spaces increased to 636 spaces across the island. Except for very large spaces, tenants generally have multiple options which can force landlords to compete for their tenancy. The result has been significant landlord concessions for tenants willing to move, including lower base rent or free base rent, smaller annual rent increases, and improvement allowances, the report says. However, “moving and tenant improvement expenses are still so high that paying an existing landlord a higher rate can sometimes be cheaper than moving,” the report says. “And, for tenants willing to limit their improvement requirements some landlords are willing to cut better deals.”

Lastly, the report notes that many tenants are looking seriously at owning their own space even though the initial mortgage payments may be higher than comparable rents. “The trick is arranging financing and negotiating a purchase price that will be at or below the appraisal value.”

Instant Insights /

Office Lease Economics Favor Occupier Side

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