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2001 Oahu Commercial Office & Guide

A decrease in vacancies in Downtown Honolulu is setting the stage for rental rate increases.

Thanks to a combination of a rebounding economy, no new office buildings and unprecedented growth in a handful of local high-technology firms, Honolulu has its lowest vacancy rate in commercial office space in nine years. According to researchers at real estate and property management firm, Colliers Monroe Friedlander Inc., vacancies in the area from River Street to Punchbowl and Kukui to Nimitz Highway were at 12.2 percent at the end of 2000, down from 16.1 percent the same period the year prior. The same area, which is referred to by Realtors as the Central Business District (CBD), represents about a third of Oahu’s entire inventory with 4,650,000 square feet of office space.

According to Colliers’ Chief Executive Officer Andrew D. Friedlander, the decrease in vacancies is setting the stage for rental rate increases. “When the marketplace gets to be below a certain vacancy then rents will escalate,” he says. “We’re seeing the start of that today.”

The gross rent rates for Class A buildings in the CBD are little changed, averaging $2.25 to $2.40 per square foot per month at the close of 2000. That’s a slight increase over the same period the year before, when rents were averaging between $2.30 and $1.85 per square foot. Still, rents are substantially lower than their peak period in the early ’90s, when prime office space warranted rates of up to $3.44 per square foot.

So what does all this mean for potential tenants? Well, it depends on who you ask. Property managers are vocal about their concerns of vacancy numbers being skewed. “Part of the problem is that everyone runs different numbers,” says Steven Sofos, president and chief executive officer of Sofos Realty Corp. “Owners have been trying to push the rents up, which I think is uncalled for because the demand doesn’t warrant it.”

Yet Colliers Monroe Friedlander research says the market has been rebounding steadily since 1997, when the Class A building vacancy rate in the CBD started to decline from its peak of 19.2 percent. And with no new developments in the works and a relatively stable absorption rate, it shouldn’t be long before vacancies drop and rents increase. Joseph T. Haas, senior vice president of CB Richard Ellis Hawaii Inc.’s brokerage services, says, “I expect vacancies to continue to drop over the next couple of years. Although at some point, there’s a finite amount of space.” Haas says that office rents in Honolulu are at a relatively low rate compared to the cost of construction, so lenders are wary about providing loans on new construction.

“The early nineties saw a huge creation of new Class A space. A whole lot of development occurred, and that was just when our economy went into the tank,” says Collier Monroe Friedlander’s Office Services Group Senior Vice President Jamie M. Brown. “That space has taken close to 10 years to slowly get absorbed.” But, according to Brown, the growth in office tenancy is due largely to ever-expanding high-technology companies. And as these New Economy companies nearly double in size each year, he says it won’t be long before the existing inventory dwindles.

These companies are struggling to find office space that can not only fulfill requirements for high-speed Internet connections and provide electrical redundancy, but also accommodate the expansion of its personnel if necessary. This leaves for little options other than new developments or expansion out of the CBD.

One high-tech company in particular has been under the microscope ever since announcing plans of a potential relocation to the Kakaako area. Adtech is a 33-year-old company that designs and manufactures telecommunications test systems on Oahu. The company is currently dispersed on a total of 100,000 square feet of office space in both Kaimuki and in the First Hawaiian Center. “If the government gets Kakaako going with Adtech and the proposed UH med school is built there as well, it will change the dynamics of what happens,” says Friedlander. “There’s going to be a tremendous amount of synergy located in that area.”

Colliers’ Brown says that high-tech companies generally want to congregate in order to share ideas, services, and sometimes even clients. These are exactly the kind of tenants that Campbell Estate hoped to attract when it built Oahu’s “second city,” Kapolei. Heavily equipped with extensive telecommunications infrastructure—receiving fiber optic and copper land lines, digital switching and trans-Pacific cable and satellite access—the city appears poised to be Hawaii’s global technological link.

But, according to Friedlander, that hasn’t been the case. “As far as being a center of technology, most young people don’t want to be out in the sticks,” he says. “The occupancy is healthy in Kapolei, but mainly because few buildings have been designated spec buildings. In other words, those buildings out there were all built for special purposes, with the tenant either owning it, or it’s built for the tenant.”

Whether or not Kapolei will develop into a viable alternative to the CBD remains to be seen. For the most part, overflow from the CBD is absorbed by the Kapiolani Corridor (from South Street to Kalakaua Avenue, Ala Moana Boulevard to Young Street). According to CB Richard Ellis’ Haas, the Kapiolani Corridor has seen increasing vacancy rates over the past five years, during which a lot of space was available downtown. Haas expects vacancy on the corridor and in the CBD to drop steadily and foresees increased absorption and rent rates on the horizon. He expects absorption rates to double for the next several years to around 200,000 square feet per year. Colliers’ market researchers have already announced their 2000 year-end absorption figures at 181,830 square feet. “It’s been about 100,000 for most of the last 10 years, but we’ve had a very poor economy,” says Haas. “You might think my absorption numbers are optimistic, but my experience tells me that the activity levels are very high right now.” His advice: “If you’re a tenant planning to move you should probably move as soon as you can.”

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