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Construction Industry Outlook 2012

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Proceed with Caution

The construction industry is poised for action with pent-up demand and aging infrastructure projects. Will it come?

Hawaii’s economy ended 2011 in a big-grinned upswing. Hawaii’s tourism industry, the state’s economic engine, was looking to its highest growth in tourists and amount spent in four years. The holiday season sparkled with best sales for many retailers in three years. Personal income and the state’s jobless rate remaining unchanged were also encouraging news during this long and slow recovery.

For the first time since 2008, Hawaii’s construction industry saw job growth numbers pop through to the positive column in 2011. However, all growth was attributable to Oahu with the Neighbor Islands still losing construction jobs.

Is all this growth sustainable? Most economists and industry insiders remain cautious about 2012’s prospects.

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“Overall, we will continue to have slow recovery. Even under the best of circumstances, the best scenario is a slight, but only slight, acceleration for 2012,” says Leroy Laney, First Hawaiian Bank economic adviser and Hawaii Pacific University professor of economics and finance. He is not predicting a double-dip recession for Hawaii, but says continued European debt problems and our own national debt debate in Washington have driven most forecasters to revise down their forecasts recently for early 2012.

For construction in 2012, Laney points to the continued weakness in construction completed, taken from the tax base, and continued decline in private construction permit growth. “Buying an existing home is still more affordable than (buying) a new one,” he notes. For Hawaii’s important residential real estate market, “overall confidence could be playing a larger role,” he says, in continued weak sales, despite record low interest rates and last year’s substantial increases in sales and a turnaround in median prices after years of decline.

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“Cautiously optimistic” is how Executive Director John White describes the construction outlook for 2012 from Pacific Resource Partnership (PRP), which serves as the bridge between Hawaii’s leading contractors and the 5,700-member Hawaii’s Carpenters Union. “But only if certain conditions are met will we begin to see a re-emergence of construction from one of its lowest periods,” he adds. White says private developers continue to be challenged by investment uncertainty during this recovery, exacerbated by long-standing entitlement issues in Hawaii’s regulatory environment. “Some projects languish for seven to 10 years before obtaining permission to build.”

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According to PRP, unemployment rates during some months in 2010 and 2011 among union members had reached as high as 100 percent in Kona and 71 percent in Hilo on the Big Island, 73 percent on Maui, 66 percent on Kauai and 47 percent on Oahu. "For nearly any other industry in the state, such unemployment levels would have indicated industry collapse," says White, who calls construction’s volatility “the canary in the economy’s coal mine.” 

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White believes public sector construction can provide some stabilization in 2012. The November 2011 University of Hawaii Economic Research Organization (UHERO) report noted a substantial volume of government infrastructure work, including the Governor’s New Day Work Projects, massive sewer construction to address problems with aging Honolulu sewer system and other projects. But as of late last year, “this has not led to any increase in (2011’s) official figures for government contracts,” according to UHERO, whose latest construction forecast is due in March. On Jan. 9, the Honolulu Star-Advertiser reported the state Senate was pursuing as much as $500 million in new bond-financed, shovel-ready construction projects at public schools, hospitals and state buildings to try to kick-start the industry.

The state’s Hawaii Community Development Corporation (HCDA) is also looking to expand development along Kakaako’s waterfront area, to explore energy generation and other passive use projects in Kalaeloa, and to restore wetlands, meadow lands and explore the potential for agricultural cooperatives and cultural activities in its newest development district of Heeia. “I’m obliged to be bullish and optimistic about building and construction in 2012,” says HCDA Executive Director Anthony Ching. “We feel this is the time to move ahead.”

PRP’s White sees promise for construction work in renewable energy projects from the military and the private sector, such as Oahu’s first and largest utility-scale photovoltaic project, the Kapolei Sustainable Energy Park, completed in December 2011 and expected to generate 1.18 megawatts of clean, renewable solar energy.

Both Laney and White point to Honolulu’s $5.27 billion 20-mile rail transit project, the state’s largest ever public works project, as having the biggest potential to boost Oahu construction in 2012. However, because of lawsuits by rail opponents and still-pending federal funding, uncertainty hovers over the timing of the project. In late December, the city received approval from the Federal Transit Authority to begin “Final Design” on the project, but the city still needs federal permission and $1.55 billion in federal New Starts transit funding to begin full-scale construction.

PRP estimates that construction jobs will be part of the estimated 8,000 jobs directly related to the project. Another 3,000 jobs will come in the form of manufacturing and preparing supplies and equipment to build the rail system. “Rail can be a shot-in-the-arm in the short term for construction jobs, and is really about development and growth centers in the long term,” explains Laney who says it will transform the face of the island of Oahu.

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