Oahu office vacancy rate down to 9.9% in 2019

Renters of office space on Oahu no longer have the upper hand against landlords after a decade of having the dominant position.

That’s the conclusion of a recent report from commercial real estate brokerage firm Colliers International.

The company said Oahu’s office market reached an equilibrium last year largely due to building owners removing office space from inventory for other uses including housing.

Still, businesses seeking to lease office space shouldn’t necessarily expect to pay less rent, the report said.

The vacancy rate for office space on the island last year dropped to 9.9%, which represented an 11-year low and was down from from 12.8% a year earlier, according to Colliers. The firm considers a 10% vacancy rate the point at which the bargaining power of landlords and tenants is balanced.

The last time Oahu’s office vacancy rate was lower was 2008 at 8.6%. The peak over the last decade was 13.2% in 2014.

At 9.9% the vacancy rate last year represented 1.4 million square feet of empty space out of 14.3 million square feet.

Last year’s drop in office vacancies was driven in part by the owner of a downtown tower called 1132 Bishop starting to convert the building to residential use over three years. An initial wave of tenants in the building relocated to other properties, Colliers said. The full conversion will remove about 320,000 square feet of office space from the market.

Other factors included the owner of the Waikiki tower 1833 Kalakaua taking vacant space off the market as it explores redevelopment options, Colliers said in the report.

The report also noted that two office buildings downtown with multiple tenants were sold to owner-users — a church and an insurance firm — resulting in the removal of 56,000 square feet of leasable space.

In response, many displaced tenants filled vacant space elsewhere and contributed to 272,429 square feet more space being filled than emptied last year.

“Oahu’s office market encountered a surge in leasing, investment and redevelopment activity all contributing to the noticeable change in the office market environment,” the report said.

Mike Hamasu, the report’s author and research director at Colliers in Hawaii, said the 2.9 percentage point reduction in the vacancy rate was unprecedented for Oahu. Changes over the last two decades have been under 2 percentage points.

Hamasu said the 2.9 percentage point reduction was equivalent to more than 410,000 square feet of space, which is about the size of First Hawaiian Center, a 30-story tower that is the tallest building downtown.

In response to the market improvement, Colliers said landlords have been reducing concessions such as introductory free rent, moving allowances and tenant improvement cost contributions.

However, the average base rental rate asked by landlords last year was about $1.75 per square foot, unchanged from the year before, the report said.

Colliers projects that the vacancy rate this year will dip to 9.4%.