Landlords are expected to boost asking rents for new office space on O'ahu this year even as demand for space is forecast to slow to its lowest level in four years, according to a pair of new reports.

New and expanding businesses should expect landlords to ask from $2.85 to $2.90 on average per square foot to rent office space on O'ahu this year, up 10 percent to 12 percent from $2.59 last year, according to a report by local commercial real estate firm Colliers Monroe Friedlander.

Colliers said the pressure for higher rents this year, which follows a 10 percent increase last year, is from weaker but continued demand for a diminishing inventory that is at its tightest level since 1991.

"Tenants will likely face stiffer (rent) increases over the near term as competition for prime office space becomes more intense," Mike Hamasu, Colliers research and consulting director, wrote in the report.

PM Realty, another commercial real estate firm, said landlords are also passing higher costs for insurance, property taxes and electricity to tenants in the form of higher rents. But supply and demand for space was the main factor driving up rents.

"The rise in rental rates is largely a function of the current market environment, which is characterized by an unhealthy balance between the limited supply of office space and strong demand," PM Realty said in its own report.

Colliers reported that nearly 1.1 million square feet, or 7 percent, of O'ahu office space was vacant at the end of last year. Though the empty space is the rough equivalent of a 110-story building, a 10 percent vacancy rate is considered an equilibrium at which tenant and landlord leverage is balanced.

O'ahu's vacancy rate last dropped below 10 percent in 2005 to 8.6 percent. Colliers forecasts that the vacancy rate will move from 7 percent now to between 6 percent and 6.5 percent by year-end.

The continuing drop is anticipated because construction costs in relation to rental rates have discouraged new office tower construction that would satisfy some demand.

Two new large office buildings are planned, one in Kapolei and a medical office building in Downtown Honolulu, but they are not slated to be completed in the next year or two.

Colliers said businesses bolstered by robust growth in the state economy filled 249,757 square feet of O'ahu office space last year, or the equivalent of a 25-story building.

The absorption was about even with 249,515 square feet of space filled in 2005. Colliers expects demand for space this year at 100,000 square feet to 150,000 square feet, which would be the least since vacant office space grew in 2002.

Colliers said it expects reduced demand for office space in conjunction with an expected slowing of state economic growth, and low unemployment that makes hiring difficult for expansion-minded businesses. The company also said the local housing market slowdown is a factor because much office leasing was from businesses servicing home buyers and sellers such as brokerage firms, mortgage lenders and title companies.

"The residential real estate cycle appears to have peaked, and commercial markets typically follow suit," Colliers said in the report.

Reach Andrew Gomes at agomes@honoluluadvertiser.com.