Oahu’s office real estate market is on pace to have its worst year in nearly a decade, in terms of how much space businesses are vacating.
For the first nine months of this year, net gains in vacant office space totaled 196,701 square feet. That’s roughly equivalent to a 20-story building.
But the figures from a survey by local commercial real estate firm Colliers Monroe Friedlander show that the amount of vacancy growth is on the decline.
The first-quarter net gain was 90,000 square feet. In the second quarter it was 73,000 square feet. And in the most recent quarter, it was 31,000 square feet.
Most of the empty space added to the market in the recent quarter occurred in Leeward Oahu, which gained 45,000 square feet of additional empty space.
That was offset by a mix of less intensive emptying and filling of office space in other parts of the island.
The overall third-quarter vacancy rise pushed Oahu’s vacancy rate to 11.58 percent. That was up from 11.39 percent at midyear and 10.32 percent at the end of last year.
The year-to-date vacancy rate represents about 1.8 million square feet of empty space in a market holding 15.8 million square feet of leasable space.
This year through September, Oahu’s weakening office market has added more vacancy than any year since 2001, when just over 200,000 square feet of vacant space was added.
» Total leasable space: 15.8 million square feet
Vacancy rates in Oahu submarkets through September:
» Waikiki: 18.3%
Source: Colliers Monroe Friedlander
It’s pretty certain that 2010 will be the fourth consecutive year of industry contraction since 2006, when the vacancy rate was 7 percent and about 250,000 square feet of occupancy was gained.
But the recent trend for slowing vacancy growth is giving Colliers some confidence that a return to occupancy growth is nearing.
Colliers doesn’t expect the turnaround will be quick, because job growth that results in office leasing growth tends to lag economic recovery.
The report said businesses remain cautious about hiring in the near term, which doesn’t bode well for office leasing.
"While business sentiment begins to transition from negative to neutral, vacancy rates will likely continue to increase, but at a slower rate," said Sean Tadaki, a Colliers vice president and office division manager.
A report from another Hawaii commercial real estate firm, CB Richard Ellis, has a similar take, saying that business owners are focusing on short-term savings and are wary of the staying power of recent economic gains.
"Despite economic reports indicating a more positive outlook this year, many (businesses) are still exhibiting a cautious optimism," CB Richard Ellis said in its report, which tracks fewer office properties and measures vacancies with a different methodology from Colliers.
Colliers is forecasting that the vacancy rate might hit 13 percent early next year before stabilizing in mid-2011.
A historical vacancy high was 13.7 percent in 1998, closely followed by 13.6 percent in 2002.
Given the forecast for continued weakness in office space demand, Colliers and CBRE expect rents will remain soft.
In the Colliers survey, the average monthly rent landlords were seeking for empty space in the third quarter was $2.78 per square foot, up 4 cents from the average asking rent at the end of last year. However, the average rent being accepted after negotiating with tenants was under $1.50 per square foot and sometimes included a certain period of free rent and money for tenants to improve the space, Colliers said.
CBRE’s report said landlords are more focused on retaining tenants and maintaining occupancy rather than increasing rental rates. "Lease economics are still favoring the occupier side, and offers for tenant incentives, such as free rent, remain commonplace," the firm said in its report.