For office market, a calm before the storm

Oahu’s office market vacancy rate has improved, but real estate experts forecast increased volatility as the state and businesses look to consolidate operations.

The islandwide vacancy rate fell to 13.1 percent at the end of the second quarter from 13.6 percent in the year-earlier period due to economic growth that’s driving an increase in office jobs, a new report by Colliers International shows.

However, a shake-up in the market is on the horizon.

“We’ll likely see a stabilization occur in the office market for maybe the next two quarters. But after that you’re going to see a whole bunch of transition, changes and volatility that’s going to occur,” said Mike Hamasu, director of consulting and research at Colliers International.

“The forecast still remains kind of murky going forward.”

The state is seeking to acquire for government use downtown’s Alii Place, which would remove 337,370 square feet from office inventory.

American Savings Bank also is building new headquarters near Aala Park that could leave up to 100,000 square feet in downtown offices vacant once operations are consolidated to the new facility.

And then there’s Hawaii Pacific University’s redevelopment of Aloha Tower Marketplace into student housing and classroom facilities. That move is expected to increase office vacancy downtown by 30,000 to 50,000 square feet.

Meanwhile, NextEra Energy’s acquisition of Hawaiian Electric Co. could mean a reduction in offices if NextEra introduces efficiencies, though the impact is unknown, the report said.

Some landlords are also considering converting office space into alternative uses to capitalize on higher rents.

The Waikiki Trade Center is being redeveloped and possibly converted into a hotel, which would remove another 248,000 square feet.

“That in itself is probably going to be the biggest story — all the fluctuation and volatility happening in the office market,” Hamasu added.

While office rents in Honolulu’s urban core have remained unchanged for several years, the suburban markets are seeing rental rate growth, according to Colliers.

In Windward Oahu, Leeward Oahu and East Oahu, rents have risen in the past six months by 3.9 percent, 7.7 percent and 2.2 percent, respectively.

The increased rental rate trends have helped move the islandwide average office asking base rent at the end of the second quarter to $1.66 per square foot per month from $1.60 a year earlier.