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Competition Increases for Hawaii’s Office Space

More than 90 percent of Hawaii's 12 million square feet of multi-tenant Class A and B office space is located in Honolulu.

More than 90 percent of Hawaii's 12 million square feet of multi-tenant Class A and B office space is located in Honolulu.

Hawaii’s office market is dominated by Honolulu, which is home to 70 percent of the state’s population and commerce. More than 90 percent of the state’s 12 million square feet of multi-tenant Class A and B office space is located in Honolulu, with nearly 80 percent of Honolulu’s inventory situated in the four-mile stretch between the Central Business District and Waikiki.

Jamie Brown, Hawaii Commercial Real Estate

Jamie Brown, Hawaii Commercial Real Estate

Hawaii’s office tenants are primarily in industries that support tourism, military, construction and government – Hawaii’s economic drivers. These include FIRE (Finance, Insurance, Real Estate), plus legal, CPAs, architects, engineers and contractors. Hawaii also has a small but growing innovation economy that has spawned several co-working centers, incubators and impact investment firms backed by the University of Hawaii. These names include Lauren Powell Jobs (widow of Steve Jobs), Pierre Omidyar (founder of eBay) and Henk Rogers (Tetris). Larry Ellison purchased 97 percent of the Island of Lanai in 2012 for $300 million and could join the list of tech billionaires interested in supporting Hawaii’s innovation economy.

Hawaii has seen slow but steady job growth in office-using businesses, but the drive to reduce square feet per office worker and the related cost savings has resulted in a net loss of office occupancy in Honolulu since 2006.

The past few quarters have seen a tale of two markets:

1. Honolulu’s Central Business District, which accounts for nearly half of the statewide inventory, has borne the brunt of reductions in square feet per person and lost occupancy. This has set up a competitive atmosphere between landlords with tenants benefiting from large tenant improvement allowances and other concessions.

2. All the other submarkets have been stable or increasing in occupancy with much lower tenant improvement allowances and other concessions.

Fortunately for office building owners, the only new office inventory has been small mixed-use and/or medical buildings that are not tracked in surveys. The only significant project in the pipeline is a for-sale office condominium project in Kapolei in the rapidly growing southwest corner of Oahu near Disney’s Aulani in Koolina.

Rent has grown slowly over the past decade, driven largely by operating expenses with the primary drivers being real property tax and electricity for air conditioning (there is no heating in Hawaii office buildings). This has resulted in most office building owners investing in new equipment to lower energy consumption, such as variable speed drives for chillers, pumps and cooling towers. There is even a project in the works to provide chilled water from deep-sea water where the ambient temperature is 44 to 45 degrees.

Honolulu is currently building a 22-mile rail system that will connect Kapolei in southwest Oahu to Ala Moana Center, which is in the middle of the urban core between the Central Business District and Waikiki. The first portion of the project is scheduled to be operational in 2020 with the balance (including Downtown Honolulu) operational by 2025. Rail should enhance an already robust bus system in providing transportation to the roughly 60,000 people who work in offices in the Downtown area.

— By Jamie Brown, President, Hawaii Commercial Real Estate. This article first appeared in the July 2017 issue of Western Real Estate Business magazine.

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