Honolulu’s office market has remained relatively unchanged for the past decade, but recent events have led to a dramatic shift in the direction of the Downtown submarket. Office vacancy rates in Downtown Honolulu have increased consistently in recent years, and steady leasing activity has led to declining vacancy. The Downtown office market is currently the tightest it has ever been. The vacancy rate in Downtown Honolulu decreased 70 basis points to 12.1 percent in the third quarter of 2019, which is the lowest vacancy rate for the submarket in more than nine years. The average gross asking rate in Downtown decreased slightly from $2.94 per square foot to $2.90 per square foot in third-quarter 2019.
Kimberly K. Lord, CBRE
A significant amount of movement within the Downtown office market is driven by government need. The federal government, IRS, and city and county of Honolulu, as well as other engineering firms tied to civil projects, are some of the most active employers when it comes to leasing office space in the area. Non-governmental office-using job growth has stagnated in the past four years, which has hindered more growth in the overall office market. Unemployment statewide was at 2.7 percent for October 2019, according to Hawaii Department of Labor and Industrial Relations data, compared to the national unemployment rate of 3.6 percent. While the low unemployment rate signals strong demand from employers, it also shows a limited supply of new labor.
Large tenants face a landlord’s market as large contiguous spaces are coming off the market and options are likely to be limited going forward. Concessions, incentives and tenant improvements are tightening up because of the shift in the market. These market fundamental trends, combined with the tight labor pool, will present limits to office market growth in the coming year. These traits of the Hawaii market also position it as a resilient market going forward. The office market’s reliance on local business and the government sector also means it will be largely shielded from the national and global trends that could negatively impact other markets.
— By Kimberly K. Lord, senior managing director, CBRE. This article first appeared in the January 2020 issue of Western Real Estate Business magazine.