HCRE

Honolulu’s office market continued to lose occupancy in the 3rd quarter, but at a slower pace. The market, which has been losing occupancy since mid-2008, saw 38,612 square feet of negative absorption during the quarter, down from negative 98,605 in the 2nd quarter and negative 76,185 in the first quarter. Of the ten sub-markets tracked by our survey, five lost occupancy, four remained flat and one market, the Airport area, increased occupancy. The island-wide vacancy rate now stands at 14.0%, with a range of 3.6% (East Honolulu) to 24.0% (Waikiki).

Average asking gross rents (base rent plus full service operating expenses) were $2.98/sf/mth, unchanged from the 2nd quarter and $0.02/sf/mth higher than this time last year.

Landlords continue to compete fiercely for tenants, and the spread between asking and taking base rents has increased. A combination of anemic job growth and office tenants’ relentless drive to put more people in fewer square feet makes it unlikely that we will see an office market recovery until 2013.

Job growth turned positive in the 3rd quarter of 2010, but it hasn’t been enough to offset businesses putting more people in fewer square feet. While both UHERO and DBEDT are forecasting increases in job growth in 2012 and 2013, the increases will not be sufficient to significantly change Honolulu’s current office occupancy paradigm. We need slow job growth just to maintain stable occupancy.

The downtown Class A high-rise towers had one of their best quarters in the last two years as they lost only 4,034 square feet. Pacific Guardian Center signed up over 14,000 square feet of new tenants including Pacific Business News, APS Healthcare and JM Waller. Those gains were somewhat offset by downsizes such as Ledcor in Bishop Square.

The airport submarket was buoyed by a large lease to Sopogy at Airport Trade Center. The Kakaako submarket went backwards when Pyramid Insurance moved to Waikamilo. The Pyramid move was partially offset by HECO’s expansion into the old TGIF space in the Honolulu Club building.

The Leeward submarket also went backwards as Bank of Hawaii put even more excess space on the market. The Veteran’s Administration lease for a new clinic at the Hawaii Medical Center West did not help the submarket as medical office buildings are not tracked in surveys.

Despite a rebound in the visitor industry, Waikiki continued its vacancy climb to new high of 24.0%.

There are several large blocks of space that will hit the market as tenants continue their downsizing. They include a floor at Alii Place as Queen’s moves administrative offices to the medical center, a full floor at Bishop Square when HEMIC moves to two floors they bought at 1100 Alakea, and several other known downsizing tenants. And despite the fact that downtown continues to have some of the lowest rents on the island, we have seen several tenants considering a move out of downtown in search of lower parking costs.

Hawaii Commercial Real Estate’s index of available spaces decreased slightly from 713 to 707 spaces across the island. Except for very large spaces (over 30,000sf), 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 and/or free base rent, smaller annual rent increases, improvement allowances, and occasionally moving allowances and parking discounts. However, moving and tenant improvement expenses are still so high for some tenants that paying an existing landlord a higher rate can sometimes be cheaper than moving. And, for tenants willing to limit their improvement requirements some landlords are willing to cut better deals.

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.