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Construction Outlook 2013

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Brighter? Yes!

Photo: iStockphoto

Here’s why industry insiders and experts are looking to a better year in construction

Strong Signs for 2013

Indicators point to an improved year for Hawaii’s construction industry to turn the corner toward greater growth

One Ala Moana’s unit sales ad ran too early last December, but 160 potential buyers were willing to wait in line for four days for luxury units, starting at $583,000 and topping with penthouse units priced at $8.85 million. The 103 units sold in 29 hours.

On December 27, federal Judge A. Wallace Tashima ruled that construction on Oahu’s $5.26 billion rail transit project, begun on April 23 but halted in August by the Hawaii Supreme Court, can resume on all but the downtown segment. Earlier on the 19th, the U.S. Department of Transportation signed off on the federal government’s agreement to provide $1.55 billion as its share of the project’s funding.

Ho‘opili, with 11,750 homes on the Ewa Plain, and Koa Ridge’s 5,000 homes in Central Oahu were two of 2012’s biggest and most controversial housing developments approved by the State Land Use Commission, despite strong opposition from farmers, environmentalists, and current and former lawmakers. The projects are expected to displace farming in the area over the next 20 years.

Pent-up demand, major infrastructure construction go-ahead and permitting approval reflected in these three examples from 2012 have industry insiders and observers warming to a brighter outlook for Hawaii’s beleaguered construction industry.

“There is an inkling of a construction rebound unfolding. I fully expect it to continue apace, (and) in fact, accelerate gradually over the next several years,” says economist Paul Brewbaker of TZ Economics in an email. “We are already seeing the recovery starting in new residential construction…based on the number of high-density residential projects being contemplated for Honolulu’s urban core.”

Photo: iStockphoto

Last year’s indicators also suggest long-awaited optimism in Hawaii’s construction industry, as seen in project preparations getting underway for both public and private sectors. According to a November 2012 report by the State Department of Economic Development and Tourism, state capital improvement spending rose 32.9 percent during the first three quarters of 2012. Permit awards for the first 10 months of 2012 increased a significant 43.7 percent over the same period in 2011, reported Eugene Tian, the state’s chief economist, in the Honolulu Star Advertiser.

Construction jobs, which had dropped to 27 percent below the 2007 peak, did grow a modest 1.4 percent in the third quarter of 2012. But this is after 17 consecutive quarters – more than four years – of decline. UHERO’s November 2012 State Forecast expects construction jobs to accelerate to “a brisk 7.7 percent gain in 2013.”

Federal construction spending may also play a big role in 2013, pending resolution on major question marks on cuts in defense spending deferred until March. The $41.4 million barracks renovation at Schofield Barracks got underway last year. Plans for an even bigger building project at Marine Corps Base Hawaii in Kaneohe Bay for the MV-22 Osprey and other aircraft is estimated at $578 million.

Priming for an up cycle?

The construction industry’s volatility, with wide swings into high and low activity, has been viewed as critical barometer for the state’s economic health because of its dramatic effect on building activity growth, subsequent economic activity and work force stability. The industry’s fortunes track with the ebb and flow of the state’s economy. According to Brewbaker, “conditional on a relatively stable macroeconomic environment during the remainder of the 20-teens, another great, long residential construction upswing, such as during the 1980s’ ‘Japan Bubble’ and the 2000s’ ‘Sub-Prime Bubble,’ may be in the offing.”

Brewbaker calls the number of high-density residential projects under consideration for Honolulu’s urban core as “the most interesting prospect for construction in Hawaii in the 21st century, at least for Oahu.” He adds that “paving over the remaining open space is…widely considered to be inappropriate” and “urban sprawl is inefficient.”

In this context, the planned East Kapolei to Ala Moana Center elevated rail line, Hawaii’s largest public works project ever, among other transportation investments, “seem inevitable to remap the pattern of (traffic) congestion…by creating a more efficient mobility conduit through Honolulu’s urban core,” says Brewbaker.

Pending legal challenges, there will be work on rail in 2013. With Judge Tashima’s ruling in late December, engineering, design and other pre-construction work can resume throughout the 20-mile project path, even before issues in the Ala Moana area are resolved by the Honolulu Authority for Rapid Transportation (HART), which provides city oversight on the rail project.

Moving on an “urban vision”

In mid-December 2012, 690 Pohukaina moved closer to reality with the selection of Forest City Hawaii as the developer of the $500 million mixed-use project in Kakaako, which will include 800 affordable rental housing units. To be built on state land, the project, to include Hawaii’s tallest building at 650 feet (exceeding the present highest, the 438-foot First Hawaiian Center), will be in pre-development in 2013 and is expected to break ground in 2014, according to Anthony Ching, executive director of the Hawaii Community Development Authority.

Starting in the latter part of 2012, this year “will likely see significant activity from the private sector responding to our initiatives established for the need for workforce housing,” says Ching of new high-rise construction projects in Kakaako. They include Halekauwila Place, with 204 affordable units breaking ground in 2013; and 801 South Street, a 635-affordable-unit project scheduled for presale in February 2013.

Ching cites availability of capital, emergence from a low point of the recent recession, ongoing public planning and involvement of private landowners as reasons for projected urban renewal activity in Kakaako in 2013. Private developers involved in Kakaako projects include Kamehameha Schools with its 15-year Kakaako Mauka Master Plan, and Howard Hughes Corp., Kakaako’s largest private landowner with 60 acres, including Ward Centers.

Photo: iStockphoto

Ching is enthusiastic about moving on the state’s “urban vision” for Kakaako: a compact, walkable community; an active streetscape of shops, restaurants and services; and a transit-oriented development designed for a mix of transportation means, including bike lanes, buses and walking. Emphasizing the creation of “Complete Streets” of walkable streets with cafes and small shops, “we’re looking to encourage people to get out of their cars,” he says.

Looking ahead

With a record-breaking 8 million visitors, job growth for the first time in four years, the 13th lowest unemployment in the nation, and rising real estate sales, Hawaii closed 2012 primed for a good year in 2013. Lingering and emerging clouds ahead may darken the outlook. Hawaii’s unexpectedly new congressional delegation faces a March 1 deadline of major cuts in both domestic and defense spending. Federal expenditures, averaging $6.5 billion annually and supporting 100,000 jobs, and make up Hawaii’s second largest economic sector.

Looking at long term trends, economist Brewbaker points to a “troubling observation (that) federal, state and county combined government construction contracts are lower today than at almost any time since the mid-1960s (when my data starts).” As a percentage of GDP (gross domestic product), he says “public infrastructure investment has shrunk from more than 5 percent to less than 1 percent.”

Indicators point to a brighter year ahead in 2013 for construction in Hawaii. It may prove to be one of the most interesting.

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