Maui Discussion

Construction Recovery “Fails to Materialize”

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By Susan Halas

busy job site

Work is progressing at the expansion of the Nisei Veterans Memorial Center in Wailuku. Susan Halas photo.

Hawaii construction is the subject of  the Economic Research Organization at the University of Hawaii (UHERO) report released today. UHERO sees the industry edging toward recovery, but makes a clear distinction between Oahu, where the outlook is more favorable, and the neighbor islands, especially Maui, where conditions have yet to turn around.

“The beginnings of a construction recovery that we had anticipated failed to materialize,” UHERO wrote. “Instead of a modest expansion in permitting for residential and commercial construction, additional significant declines occurred and the much ballyhooed plans for large, ongoing public sector spending fizzled with a nearly 60% drop in government contracts awarded in 2011 construction activity—especially construction jobs—were disappointing.”

The UHERO economists predicted that “The construction job count, which averaged 28,500 in 2011 (statewide), will rise above 29,000 this year and to nearly 36,000 by 2015 when it anticipates “both rail and the next housing upswing will be pushing activity.”

As for future risks the report said the biggest are “a potential halt to rail and pricey oil.”

Signs of Life


The UH economists said some signs of life were evident in commercial construction, although there was a small net loss in permitting for the year as a whole. Non-residential permitting has been fluctuating around a fairly stable average level of about $300 million per quarter.

Though the economists gave most of their attention to Oahu, they did note some construction activities on Maui, particularly in the commercial sector.

“There were large county differences in non-residential permitting activity.  Maui County experienced substantial growth in the second half of 2011, and by the end of the year the value of issued commercial and industrial permits was 60% higher than in 2010. This was a better performance than Hawaii and Honolulu counties, where there were significant net losses.

The boost in the value of permits issued in Maui County was due to large construction projects at the four-story Marriott Courtyard hotel at the Maui airport, Mycogen Seed Research Field Station, and the construction of LDS Church buildings.

Additions and alterations permitting rose by 7.4% (statewide) in 2011, with the highest growth rate observed in Maui County.


Activity at Maui Lani

time warner maui lani

The Time Warner Cable headquarters is under construction at Maui Lani. Susan Halas photo.

On Maui, the center of development activity continued to be in and near the Maui Lani master planned community just south of Kahului. The report noted that development of Maui Lani Village Center is ongoing. Retailers there include Times Supermarket, Walgreens, Oceanic Time Warner Cable, 76 Gas, and Marmac Ace Hardware.

In 2011, a number of additional businesses and retailers have broken ground on their future Maui Lani facilities with plans to complete construction in 2012.

The Kehalani Village Center, a $50 million, 200,000-square-foot commercial project by developer Stanford Carr, is under construction, kitty corner to the Maui Lani Village Center. It will include a Foodland store, a Longs Drug store, a McDonald’s restaurant, and an Aloha Petroleum gas station. Ground-breaking was on Nov. 3, 2011.

construction kehalani commerial

Construction is progressing at the Kehalani Village Center in Central Maui. Susan Halas photo.

Eclipse Development Group’s more than $200 million Maui Outlets shopping center in Kihei is scheduled to begin construction in the near future. The adjacent Piilani Promenade is in the pre-development phase but has already started pre-leasing spaces. A&B Properties, Inc. is going ahead with the next phase of its Maui Business Park.


Maui Resort Segment

Hyatt is a co-developer with Starwood Capital Group of a major redevelopment project on Maui, a complete renovation of the former Renaissance Wailea Beach resort. Reopening of the resort as an Andaz hotel is expected in 2013.

At the Makena Beach and Golf Resort on Maui phase one of a project to renovate all 290 guest rooms and 20 suites and other amenities is underway and expected to be completed by April 2012. Work on a 2,500 square foot fitness center was completed in October 2011.

Earlier in 2011, plans by owners of the Grand Wailea Resort for a $250 million, 310-room expansion stalled after a group of lenders including Paulson & Co. seized control of former CNL Hotels & Resorts Inc. (Grand Wailea makes up 42% of the mortgage collateral). A struggle over permit issuance is now tied up in court proceedings. The expansion would make the Grand Wailea Maui’s first thousand-room resort.

Government Contracts and Public Projects

Contrary to expectations, 2011 turned out to be a disappointing year for government contracting. The real value of government contracts awarded was lower than at any time since 1973, falling by over $600 million in current dollars from the high of more than a billion dollars in 2010.

On Maui funding has already been secured for expansion of the access road to Kahului Airport and parking lot, with the construction expected to start in mid-2013.

Two Maui County projects made progress. After a long and frustrating process, the construction of Veterans Center on Molokai is finally nearing its completion. Also, at the end of 2011, the Pacific Cancer Institute of Maui received an alteration building permit and is ready to go ahead with its nearly $7 million expansion and renovation project.

Maui Energy Sector

The report noted that the Maui Planning Commission has approved construction of the Auwahi Wind farm on Ulupalakua Ranch land on Maui. The $140 million project is expected to begin construction in early 2012 and to be finished by December. It is important to note that the bulk of this project cost is not for construction, but for the turbines.

First Wind on Maui is in phase II of its Kaheawa Wind Power facility on the West Maui Mountain ridge, which will bring the total capacity there to 51MW. We will see additional alternative electricity infrastructure spending in coming years as the state works to move toward its very ambitious goal of 70% renewable by 2030.

Residential Permits Decline

The value of statewide real (inflation-adjusted) residential permits fell more than 13% in 2011, to the lowest level in more than 30 years. Although each county has seen a decline, conditions remain weakest on the neighbor islands.

Temporary positive spikes in residential permitting activity in August on the Big Island, and in February and June on Kauai, were a departure from what has otherwise been dismal performance. For the year, residential permitting levels were off 12-19% in the neighbor island counties. The current levels are 78-86% below the peak values seen in 2005.

Across the Hawaiian islands, things remain relatively quiet in housing development, and entitlement has remained a challenge. The report noted that the State Land Use Commission approved the $35 million, 116-home Kula Ridge subdivision on Maui.

Weak Residential Resales

home resale graph

Value of Hawaii home resales by island. Courtesy UHERO.

According to census data, both rental vacancy rates and home ownership rates receded in the past five years, indicating a preference for renting instead of owning a home. At the same time the excess supply of homes was slowly declining. Although the homeowner vacancy rate (the fraction of unoccupied homes for sale) has declined, it is still above 2006 levels. In addition, the sale of foreclosed homes is also crowding out the need for new building.

The report said these factors are much more severe on the neighbor islands than on Oahu. As the result of this ongoing imbalance of supply and demand, home values continued to decline in 2011. Oahu had a 5 month inventory of unsold homes, both single family and condo. By comparison, 2011 year-end inventory on Maui was in the range of 10-15 months.

Interest Rates Still Low

The fallback in resale activity came despite nominal mortgage rates falling to historic lows (in December, the national 30-year average fixed rate mortgage reported by Freddie Mac fell to 3.91%, and as of mid February stood at 3.87%, the lowest nominal rate in records going back to April 1971).

For the year as a whole, the resale number was 3% higher than in 2010. This is far below the almost 20% growth rate Hawaii experienced in 2010, when federal tax credits artificially raised first half volume.

Resale prices on Maui continued to show weakness throughout 2011. Median single-family home prices fell more than 5% in 2011, spending eight months below $450,000, and median condo prices fell more than 19%, falling below $300,000 in five months. Single-family prices fell in the affordable Central and Makawao areas 13% and 15%, respectively. Prices surged in the upscale Wailea-Makena and Kaanapali areas 32% and 14%, respectively. At the same time, the Kaanapali condo market suffered the largest decline in the number of sales, -49%, and the largest price decline, -21%.

UHERO also predicted that delinquent homeowners are likely to be hit by another wave of foreclosures in coming months. The nation’s largest lenders had slowed the pace of home seizures in 2011 as they negotiated with attorneys general in 50 states over allegations of improper foreclosure documentation. However, in early February they reached a settlement agreement that will help the banks to clear the backlog of foreclosures.

UH economists said  the 30-year conventional mortgage rate is expected to remain near historical lows this year, not rising above 5% until 2014.

Neighbor island housing markets remain very depressed, and prospects for near-term gains are limited. The good news, said UHERO, is that volume has generally picked up; the bad news is that much of this appears to be bottom feeding.

Future Outlook

sitework ab biz park

On Maui signs of a rebound were strongest in the commercial sector. Shown here is site work at the next phase of A&B's Business Park. Susan Halas photo.

The commercial sector fared better than the residential sector last year. It will see a big bump in 2012 and remain at a moderately strong level thereafter. New action in the non-residential sector will be spread across condominium, retail and resort development.

UHERO predicted that the total value of real non-residential permits will jump more than 40% this year, to more than $1.6 billion and will sustain a similar level of activity through mid-decade. This is roughly in line with the level of permitting in 2005-2006 and represents a significant increase over last year’s forecast.

The total value of real government contracts awarded will more than double in 2012 from last year’s paltry $431 million. Spending above $900 million dollars is anticipated in four of the next five years. The economists  noted that these figures exclude the value of contacts that are not undertaken through the normal open bid process, most importantly the massive contracts for Oahu rail transit.

The UHERO forecast for overall private construction is somewhat weaker and delayed compared with what we projected a year ago. Real permits for 2012 are expected to rise by a strong 48% this year, but a large part of this reflects recovery from the unexpectedly weak level seen in 2011.

UHERO predicted nonresidential construction, rail, and other public construction will turn the tide this year. The construction job count, which averaged 28,500 in 2011, will rise above 29,000 this year and to nearly 36,000 by 2015 when both rail and the next housing upswing will be pushing activity.

Of more immediate concern is the renewed surge in oil prices to roughly $110 per barrel. The prices of oil and other commodity prices contributed significantly to cost appreciation during the 2000s; a further rise in energy prices could quickly translate into higher construction costs.

The report called the job markets ice cold on the neighbor islands and tepid on Oahu. It noted that office vacancies in downtown Honolulu have drifted up into the low teens percentage-wise. Resorts are still building back occupancy and yields lost during the recession. No government seems in a particular hurry to ramp up infrastructure investment. Investor optimism remains quieted.

Both homeowners and prospective home buyers require an expectation of rising house prices to get their investor juices flowing. A flat home price environment like Oahu’s, with falling prices on the neighbor islands, combined with wider economic uncertainties, have inhibited a rebounding investor sentiment.


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