The Tide Turns in Hawaii’s Office Market
Honolulu’s office market has been stagnant for nearly 20 years with negative supply growth, limited demand, constant reductions in square feet per person and a very tight labor market. However, conversions from office to residential and/or hotel use and a major tenant move could change the market starting in 2019.
Multi-tenant inventory has decreased by about 500,000 square feet since 1996 with the conversion of an office building to a hotel in 2015 through 2017; another taken off the market in 2016 for a hotel or residential conversion; and yet another converted to office condominiums in 2004. The market currently has about 11 million square feet in 73 Class A and B multi-tenant buildings. Half the inventory and 65 percent of the vacancy (940,000 square feet) is in the Central Business District (CBD), which is Hawaii’s financial center and sits adjacent to federal, state and municipal centers.
New inventory has been limited to owner-users, medical office buildings and small mixed-use buildings. These include Hale Pawaa, a 135,000-square-foot medical office building, the 160,000-square-foot FBI building, the 240,000-square-foot NOAA Regional Center, the 75,000-square-foot Princess Kamamalu State office building and the 26,000-square-foot former Honolulu Advertiser Building for Hawaiian Dredging.
Office users are generally finance, real estate and insurance (FIRE), legal, architecture and engineering employees, which support Hawaii’s main industries of tourism, development and construction and government (federal, state and municipal). A small innovation sector has had a minor positive impact on demand, while the lowest unemployment rate in the nation (at less than 3 percent) has limited office expansions.
With stagnant demand, the only way to bring down vacancy has been to remove inventory. The conversion of the nearly 200,000-square-foot Waikiki Trade Center office building to a Hyatt Centric hotel in 2015 to 2017 brought Waikiki’s vacancy down from more than 20 percent to less than 10 percent. It also raised full-service gross rents from about $3.25 per square foot, per month to $4 per square foot in Waikiki’s core office buildings.
Despite having Honolulu’s nicest office space, the city’s CBD has the highest vacancy at nearly 17 percent and some of the lowest full-service rents at $2.80 per square foot. However, Douglas Emmett, which owns about one-third of the CBD inventory, plans to convert Bishop Place, a 462,000-square-foot office tower, into a residential rental project beginning in mid-2019. That conversion will cut vacancy by more than half over the next couple years and will change the dynamic from a tenant’s to a landlord’s market. Beyond Bishop Place, there have been rumors of another office building owner looking to convert from office to hotel and/or residential.
Additional market tightening will occur in 2019 as Hawaii Pacific University takes 100,000 square feet at Waterfront Plaza and Pioneer Plaza. After 20 years of the same story, we now have something to talk about in Honolulu’s office market.
— By Jamie Brown, president, Hawaii Commercial Real Estate. This article first appeared in the January 2019 issue of Western Real Estate Business magazine.