Weakened construction activity and wholesale distribution are expected to drive warehouse vacancies on O'ahu above 5 percent this year from 4.36 percent last year, according to a new industry forecast.

Local commercial real estate firm Colliers Monroe Friedlander predicts that 2009 will be the third consecutive year where more warehouse space is emptied than filled in O'ahu's industrial real estate sector, and that rents will decline for a second consecutive year.

Colliers said it expects a return to positive warehouse space absorption in 2010, with the vacancy rate dipping below 4 percent after leveling off toward the end of this year.

Though some of the present market downturn has been from contraction in construction and distribution businesses, Colliers said some of the rise in vacant warehouse space is due to recently built warehouse complexes that were intended for sale as "industrial condominiums" — but instead got dumped on the rental market as developers struggled to sell them. Industrial condominiums are individual warehouse spaces sold in much the same way residential condominiums are.

Industrial condo sales have been hurt by the recession and credit market troubles that have made it harder for businesses to finance condo purchases.

Colliers said two major industrial condo projects, Kapolei Spectrum and Waipio Business Center, have made parts of their projects available for rent, which has helped push inventory of leasable warehouse bays under 3,000 square feet to levels not seen since the mid-1990s.

Colliers also said the inventory of available space between 20,000 square feet and 40,000 square feet has tripled in the past year.

"The majority of the negative absorption over the course of the past year has been directly related to new industrial condominium projects," Mike Hamasu, Colliers research and consulting director, wrote in the report. "As the economy slows, future industrial projects will likely be shelved or postponed until development and absorption of the space becomes viable."

Last year, vacant warehouse space on O'ahu grew by 529,396 square feet, pushing total vacant space to 1.6 million square feet, or 4.36 percent of the 37 million square feet in the market.

In 2007, vacant space grew by 269,197 square feet.

This year, Colliers forecasts that vacant space will increase by about 200,000 square feet, then decrease by about 100,000 square feet next year.

Average full-service base rents being asked by landlords fell from a record $1.31 per square foot per month in 2007 to $1.24 last year, and Colliers expects asking rents will continue to soften as vacancy rates increase.

Besides extra inventory depressing the market, Colliers said business closures are expected to contribute to the worsening industrial real estate sector.

Despite the negative forecast, Colliers said that O'ahu's industrial property market remains one of the strongest in the nation. Colliers said O'ahu was one of just four major U.S. markets with industrial space vacancies under 5 percent.

Colliers said many Mainland industrial markets tend to be more volatile than Hawai'i's because they are tied to large manufacturing bases. The local market, however, is primarily tied to construction, tourism, retail and residential real estate development.