The slowdown in Hawai'i's construction industry and other business sectors has begun to dampen prices in the state's strongest real estate market: warehouse property.

Two local commercial real estate firms report that warehouse rents are decreasing for the first time in several years as demand weakens.

Industrial real estate closely tracks the local economy because most goods consumed in the state are shipped in and usually need to be stored somewhere — whether those goods be construction materials, food or retail store inventory. So the downward turn in the warehouse market isn't surprising given that experts are saying Hawai'i's economic growth is slowing to a standstill.

"It's an economic adjustment," said industrial real estate broker Mark Ambard of Ambard & Co. "It's like taking medicine. It's no fun."

For many years, Hawai'i's industrial real estate market was one of the tightest in the nation. Developers in the last few years responded by building lots of new warehouse space, some of which is still coming on line. The result has been a spike in vacant space over the last 18 months that is now taking a toll on rents.

Honolulu-based commercial real estate firm Colliers Monroe Friedlander said landlords on average are asking $1.26 per square foot per month in base rent for warehouse space on O'ahu, down from $1.31 at the end of last year. The decrease, Colliers said, is the first in seven years.

Competing firm CB Richard Ellis, in a separate report tracking the warehouse market statewide, also said average asking rents are down as of mid-year, for the first time in three years.

Jeffrey Hall, research director at CB Richard Ellis, said warehouse rates are facing continued downward pressure because surging cargo transportation costs have weakened the desirability and competitiveness of much of the newest industrial space recently built in more outlying areas of O'ahu such as Kapolei and Waipi'o.

"It's cheaper out there (to rent), but it's more expensive out there (for transportation)," he said. "It'll be interesting to see" where rents move.

Mike Hamasu, research and consulting director for Colliers Monroe Friedlander, said the weakening industrial market is primarily led by the construction industry, which he said accounts for more than 50 percent of warehouse use.

The University of Hawai'i Economic Research Organization in March forecast that inflation-adjusted construction spending will decline 1.8 percent this year, followed by a 4.1 percent decline next year.

"When construction starts to fail or fall, the warehouse market is impacted," Hamasu said.

Other businesses, Hamasu said in the report, are also more cautious about the economy and have gone into "conservative operating mode," reconsidering or postponing decisions on buying or leasing warehouse space.

The Colliers report said vacant warehouse space on O'ahu grew by 372,563 square feet — a little more than the equivalent of two Wal-Mart stores — this year through June, either by tenants vacating space or new available space added to the market. That's up from 269,197 square feet of vacant space growth for all of last year.

Still, the vacancy rate, which rose from 3 percent at the end of last year to 4 percent at the end of June, remained relatively low. A 6 percent to 8 percent range is considered to be a balance of supply and demand.

Colliers said the national warehouse vacancy rate is about 8 percent.

CB Richard Ellis said the statewide warehouse vacancy rate at mid-year was 1.7 percent. However, CB Richard Ellis tracks fewer properties on O'ahu when compiling its vacancy rate than does Colliers.

Ambard said the market could still use more inventory because so much warehouse space is old and obsolete. He said a new 99-unit warehouse project in Waipi'o near Costco was completed with 250,000 square feet of space in April and the developer has sold 12 of 75 units available. Thirteen more sales are set to close by the end of the month, which he said demonstrates relatively good demand in the soft market.

Developers aren't expected to build much new warehouse space in the next year or two because of the market's condition, according to brokers who note that two large parcels of undeveloped industrial land were recently listed for sale instead of being developed.

One property is the 66-acre former Hawaii Raceway Park, bought by a California-based real estate development firm in July 2006 and rezoned for industrial use. Brokerage firm PM Realty Group is marketing the parcel at Campbell Industrial Park without an asking price.

The other property for sale is 53 acres adjacent to the old raceway that have been subdivided for sale as 50 industrial lots, and are being marketed by Colliers.

Colliers in its report forecasts that vacancy may rise to roughly 4.5 percent next year before rebounding in 2010 to 3.5 percent if higher economic growth returns to the state as expected.