O'ahu's office vacancy rate fell to its lowest level since 1991 as businesses filled more than 112,000 square feet of office space on a net basis during the first half of the year, according to a report released yesterday.

The vacancy rate, which was as high as 13.75 percent in 2002, fell to 6.5 percent in the second quarter, according to the report by commercial real estate firm Colliers Monroe Friedlander. And the downward trend is expected to continue over the near term, the report said.

At the same time, office rents have been rising. The average asking price for office space rose to $2.66 per square foot in the second quarter, the 18th consecutive quarterly increase. That's up 2.7 percent from the same time last year, and up 12.8 percent since the end of 2005.

"It's a reflection of the healthy economy and job growth," said Mike Hamasu, director of consulting and research for Colliers Monroe Friedlander. "There is a direct correlation between job growth and demand for office space."

Another factor driving the market is a lack of new office space being constructed, Hamasu said.

"Strong demand is pushing rental rate increases. The thing holding everything back is construction costs and escalating land costs," he said.

The construction cranes dotting Honolulu's skyline largely represent residential condominium construction, not new office building construction.

With office supply constrained, rents continue to move upward quickly, but still are not high enough to justify new high-rise office construction, Hamasu said. "Rents would have to more than double in order for anything to make sense from a developer's sense."

Across the island, the availability of office space is tightest in Windward and Leeward O'ahu, where vacancy rates are 1.67 percent and 2.93 percent, respectively. The Leeward district includes rapidly growing Kapolei. East O'ahu wasn't far behind at 3.55 percent.

Worsening traffic congestion and rising parking costs Downtown will continue to contribute to increased interest among businesses seeking alternative locations, according to the report.

"Leeward and Windward office tenants will find it extremely difficult to find expansion or relocation opportunities," the report said.

However, two major commercial projects planned for Kapolei should provide some relief in West O'ahu, Hamasu said.

Avalon Development Co. is building the Kapolei Pacific Center, which would have four towers of up to seven stories in height with about 300,000 square feet of leasable area. The company plans to break ground this fall and have the first tower completed about a year later, according to the developer.

The Kapolei City Plaza being developed by California-based Kahl and Goveia will add about 300,000 square feet of leasable commercial space to the area. Two towers are envisioned — one of seven stories and the second with eight stories, including ground-floor retail space. The first building, which would take between 18 months and two years to build, would primarily target medical space, according to the developer.

The vacancy rate in Waikiki was the highest on O'ahu, at 13.66 percent. The vacancy rate in the central business district was 6.74 percent.

Reach Alan Yonan Jr. at ayonan@honoluluadvertiser.com.