Retail rents began to spike at midyear as competition for a limited amount of prime retail space pushed rates upward, according to a report by Colliers International set for release today.

“The biggest news is the steady increase in rents. That’s all because healthy market conditions are driving tenant demand,” said Mike Hamasu, Colliers director of consulting and research. “It pushes vacancy rates down and ultimately makes rents more expensive.”

The islandwide average asking base rent, not including operating expenses, grew to $3.82 per square foot per month in the third quarter, up from $3.54 a year earlier, according to Colliers’ midyear retail market report.

Meanwhile the vacancy rate fell to 3.7 percent from 4.3 percent a year ago.

“For a market at equilibrium (where tenant and landlord have equal negotiating stances), an 8 percent vacancy rate is considered a healthy market,” the report said. “Oahu’s sub-four percent vacancy rate firmly establishes Oahu as a landlord’s market and amongst the tightest retail markets in the country.”

The national retail vacancy rate is about 10 percent.

So far this year the average asking base rent has risen by nearly 5 percent. Rents have increased by a total of 17.9 percent over the past 11 quarters. The largest gains were in Waikiki and West Oahu, where average asking base rents jumped by 13.1 percent and 9.5 percent, respectively.

However, higher rents and low inventory may be short-lived.

“On the horizon you have a whole lot of development currently planned or proposed,” including Ka Makana Alii, a regional shopping mall in Kapolei; the expansion of Ala Moana Center; and the redevelopment of the International Market Place. “You’ve got all kinds of different projects that are on the drawing board or underway. That’s going to help alleviate some of the pent-up tenant demand or pressure.”

However, one caveat to development noted in the report is wage inflation driven by Hawaii’s low unemployment rate, which could threaten some of the projects in the works. Honolulu’s retail center construction costs are among the highest in the nation.

Despite the 3,700 new construction positions added over the past year, many general contractors are finding it difficult to find skilled construction labor, the report said. In turn, retailers are beginning to experience significant price increases for their expansion projects.

“That might dampen some of the development activity. If construction costs increase significantly, you’re going to have some developers that have proposed projects that will have to be put on hold,” Hamasu said. “Or (you’ll have) tenants thinking of expanding that can’t pay for the construction of new stores.”