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Hawaii Business Construction Industry Outlook 2011

Upswing in Sight? A “wait-and-see” year can mean tough times may linger or the corner may be turned for the construction industry

Hawaii Business Construction Industry Outlook 2011

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"Flat is the new ‘up’” has been the often heard refrain in Hawaii, as the state and the nation struggle through the uneven recovery of the longest recession since World War II. Hawaii’s construction industry, particularly, remained depressed at the end of 2010, despite the downturn’s official end in June 2009. Dwarfed by tourism and the military, construction is nevertheless a critical barometer for the state’s economic health because of its volatile effect on building activity growth and work force stability.

Industry insiders generally agree with the assessment that “we are at the cycle’s bottom” by the University of Hawaii Economic Research Organization (UHERO) in its December 2010 State Forecast Update. In 2011, UHERO expects construction activity, based on the general excise contracting tax base, to rise by 5.5 percent and annual average construction employment to increase a modest 0.9 percent – figures that do not incorporate the impact of rail mass transit.

Others remain more cautious. Ron Taketa, financial secretary and business representative for the 6,800-member Hawaii Carpenters Union, believes that construction will remain flat in 2011. As a sign of the times, over the last three years, the union saw 70 percent of its members’ work flip from commercial and industrial projects in the private sector to government-funded public works. But the government’s 70 percent is from a far smaller pie and the private sector’s 30 percent has also shrunk, says Taketa. As a result, about 55 percent – roughly 3,200 – of the union’s 5,900 active members were unemployed at the end of December 2010. Oahu’s carpenters fared better with 45 percent unemployment because of the island’s military bases; but Maui’s 65 percent and Kona’s hard-hit 94 percent reveal the recession’s deep toll on idle carpenters and their families.

Economist Paul Brewbaker, principal of TZ Economics and chair of the Council on Revenues, says that while better-than-predicted visitor numbers and international recovery are signs of brightening for Hawaii’s economy, he also cautions that “the industry is facing a valuation dilemma with investor confidence.

“For investors right now, it’s better to buy than to build,” he says of diminished private sector projects. High commercial vacancy rates and tougher credit rules that dampened new construction in favor of renovation may linger into 2011.

“This year will be tricky for builders who wait to see how things go,” explains Brewbaker. “Timing is really critical, as the ‘sweet spot’ (for investors) is at the front end, just before the cycle begins to ramp up.” Unlike others who see a slow recovery for construction, he foresees a U-shaped recovery once it starts, and possibly even a V-shaped upswing.

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Honolulu’s mass transit rail project can be a game-changer for 2011, says Lance Wilhelm, president of the Hawaii Developers Council and senior vice president of Kiewit Pacific Co. Last December, newly elected Governor Neil Abercrombie signed off on the rail transit environmental impact statement to set in motion the environmental review of the city’s $5.5 billion system – Hawaii’s largest public works project.

“Rail can be an impetus for additional investment growth,” says Wilhelm, who notes that his company was awarded a $483 million contract in 2009 to build the first third of the project. If rail gains momentum, investors may move on land development opportunities along the project’s route. Wilhelm also sees potential in resort construction, pointing to Kyo-ya Co.’s $700 million redevelopment of its Sheraton Princess Kaiulani and Westin Moana Surfrider hotels projected for 2012.

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Public sector projects will continue to provide 2011’s steady construction activity. According to Hawaii Community Redevelopment Authority’s Executive Director Anthony Ching, among new 2011 public-private projects are the $70 million 202-unit Halekauwila Place affordable rental housing, the $50 million FBI headquarters in Kalaeloa, and the $10 million Ocean Investments restaurant/meeting site complex at the former John Dominis Restaurant site – all projected to break ground in early 2011. Major continuing projects include the $130 million Cancer Research Center and the estimated $150 million 492-unit Pacifica Honolulu condominium (formerly Moana Vista).

With building permits rising, real estate prices increasing and construction unemployment tapering off, the industry’s “wait-and-see” mood for 2011 may be in for some promising surprises.

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