Rebound Looms

Optimism prevails, But office vacancies are still on the rise.

They might be a little dusty after having been shelved for several months now, but the optimist hats worn by Oahu’s commercial real estate brokers are back in style and being donned in full force. While real estate has always been a lagging indicator as opposed to a sign of what’s to come, Oahu’s brokers are confident that the market will turn around. Those in the know say Hawaii’s real estate market isn’t too bad, after all.

“When you’re looking at trends in the marketplace, we’ve had it worse,” says Frances N. Okazaki, director and principal broker for CB Richard Ellis. “Even though we’re hearing ‘Oh gosh, there’s a lot of vacancy and it’s increasing,’ relatively speaking, it’s not that bad.”

In 1999, the year-end vacancy rate for Class A and B buildings in the Central Business District (CBD), which runs from River Street to Punchbowl and Kukui to Nimitz Highway was at 14.1 percent, according to CB Richard Ellis. In 2000, growth in the tech sector fueled an increased demand for office space, and the vacancy rate fell nearly two percentage points to 12.2 percent by year’s end. At the end of 2001, vacancy rates had crept back up to 13.5 percent, following the burst of the tech bubble and the aftereffect of Sept. 11 on local businesses. “When you really think about it, we’re not as bad off as we were two years ago, even though vacancies are increasing.

They’re increasing relative to where we were at the end of last year,” Okazaki says.

In fact, compared to other U.S. cities, Oahu’s commercial real estate market is remarkably stable, demonstrating resilience toward sharp swings in the economy. Colliers Monroe Friedlander Director of Consulting and Research Mike Hamasu recently stacked Hawaii up against the California Bay Area: “San Francisco saw a huge spike in average rental rates in 2000, upwards of $6.50 per square foot, then a huge drop back down to $3.00. Same with their vacancy rate, in the late ’90s, it was 2 percent or 3 percent. Now it’s close to 20.

“Hawaii has stayed fairly stable, between 10 percent and 13 percent over the past 10 years, with average rental rates hovering around $2.00,” he says. Hamasu’s colleague, Jamie Brown, adds that a big movement for the local market is a few percentage points up or down, whereas in really dynamic markets, those types of small shifts are nothing. “You look at the charts of all the big indicators in our market, and all the lines over time in the last decade just wiggle.

They don’t take big leaps and dives,” says Brown, senior vice president of Colliers Monroe Friedlander’s Office Services Group.

It’s still not exactly a landlord’s market, and, at best, Oahu won’t start to see decreased vacancy levels and positive absorption until early next year. For 2002, most brokers are predicting vacancy levels will continue to increase slightly through midyear (again, just a few percentage points), then make a small recovery as businesses convalesce during the third and fourth quarters – ending the year flat, with little to no change.

That is the optimistic scenario. Hamasu reported an islandwide negative absorption last year of 200,000 square feet, and he is forecasting another 200,000 square feet of negative absorption for this year as well. Hamasu says that if this holds true, the island’s vacancy rate would, in fact, increase by another one to two percentage points.

“What I think is the peak will be between 13 percent and 14 percent, then it’ll start heading down again,” he says. “There’s a big correlation between office vacancy rates and employment growth. We’re seeing tech downsizing and consolidation in the general economy, and, when that happens, of course you’ll see negative absorption.”

CB Richard Ellis’ Okazaki says businesses are scaling back on office space, not only as a result of Sept. 11, but also because they simply require less space than they did in the past. She notes that the advent of the Internet has wiped out the need for libraries and paper records for law firms, insurance companies and the like. “The size of businesses today just isn’t as large,” she says. “Most businesses are downsizing, and not because they’re doing badly, but because they’re operating more efficiently.” The flipside is that Hawaii businesses are already accustomed to working fairly lean, after having to endure an economic downturn in the early ’90s. Many companies may not have any excess fat to shave this time around.

And not all companies are downsizing. Chris Kanazawa, president and chief executive officer of Coldwell Banker Commercial Pacific Properties, says his clients who are property owners are finding a few pockets where companies are looking to expand and grow. “People are looking for opportunities, so I’m optimistic,” he says. “Clearly, through at least the first three quarters of this year, we’re not going to see a lot of activity, but I’m certainly optimistic things will turn around.”

Kanazawa says everything is hinging on the first quarter, when businesses will start to see the results of decisions made post-Sept.11. Those assessments will really dictate growth in the market, he says.

One thing is for sure: The market will mirror economic trends. Business recuperation, increased visitor arrivals and lower unemployment levels will all be indicative of a rebounding office market. State economists have predicted recovery for the Islands to begin around the third or fourth quarter of this year. Brokers are predicting market recovery to follow suit. “We’re looking at mid-2003, possibly 2004, before we start to see positive absorption come back to the marketplace,” says Hamasu. “But 2000 was a fantastic year for Hawaii, with close to 400,000 square feet of positive absorption, so again, it’s all relative.”

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