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Deconstructing Industry Myths

The Truth About Hawaii’s Construction Industry

These are common perceptions. However, they couldn’t be further from the truth, evidence that the ground is quickly shifting under the feet of an industry. Let’s take a look at other misconceptions about Hawaii’s construction industry, a $3.7 billion sector that employs 6 percent of the state’s population.

GOVERNMENT CONSTRUCTION IS NOT BOOMING
The media has chanted the mantra that housing and government construction are sustaining Hawaii’s construction industry. Those claims, however, are only half-right. While residential building continues to expand smartly, government spending has hardly lived up to expectations.

Paul Brewbaker, chief economist for Bank of Hawaii, says any upswing in government construction is mythical. "There is no significant upward trend in public construction, even though total construction spending is up 30 percent cumulatively over the past four years," Brewbaker notes.

In the fourth quarter of 2002, the value of residential housing permits leapt 44.9 percent over the same period in 2001, while the value of government contracts awarded plummeted 48.9 percent. The upswing in 2002 government construction follows a statewide boom in public construction, which occurs like clockwork every other year (even-numbered years).

While big government spending continues to slumber well below the $1 billion annual mark it attained in 1991, the private sector is showing Hawaii the money. "The current cyclical construction upswing … is all about private investors, without significant help from any government jurisdiction," Brewbaker says.

Of course, military construction in the near future could well prove an exception to that rule. Various branches of the U.S. military are planning billions of dollars in home construction and base renovations, largely on Oahu. This year, thanks to the Washington wizardry of Sen. Daniel Inouye, Hawaii will receive $258 million worth of military construction projects. However, with the state facing dire fiscal straights last year (an even-numbered year), the construction sector will likely get little help from the government this year.

Estimated Value of New Private Building Authorizations and Government Contracts Awarded

Estimated Value of New Private Building Authorizations and Government Contracts Awarded

Source: county building departments by the Hawaii State Department of Business, Economic Development & Tourism

THE HOUSING MARKET BUBBLE
The 50th state hasn’t seen a housing market like this since Japanese speculators drove around Kahala offering brown paper bags full of cash in the late 1980s. The average single-family-home sale price has soared to $350,000, from below $300,000 in 1999.

Prices are increasing at a 10 percent to 15 percent annual clip, while East Honolulu and resort communities are seeing 50 percent increases. The increases have been so rapid on Kauai that the rental market has practically disappeared. On Maui and the Big Island, affordable homes start at more than $220,000. On Oahu, the long-suffering Leeward Coast has even started to see significant price appreciation. Naturally, homebuilders have rushed to cash in on the mood.

Now, a growing number of housing bears claim that the state is in a bubble turf. And when the bubble pops, it will hammer the robust residential construction sector.

Perhaps not. Ask Mary Flood whether the bubble is about to burst, and she will laugh. Flood, the vice president of sales and marketing at Schuler Homes, is seeing strange behaviors reminiscent of the late 1980s (such as people lining up at 4 a.m. to buy new homes that haven’t been built on the opening day of a project Schuler has yet to advertise). "We have cut back on our marketing on television and radio ads, because the demand builds up week after week when we don’t have anything to offer," Flood says.

Keep in mind, though, that these are not speculators, the harbingers of real estate doom. They are just Jane and Joe Kealoha cashing in on low interest rates to buy a piece of the Island dream in Waipahu or Kahului.

The prediction is that these buyers will keep on buying. The post-crash stock market seems to have a limited upside, while interest rates remain ridiculously low. Most importantly, Hawaii’s real estate prices historically have been cheap. Brewbaker, of Bank of Hawaii, says the average home price in Hawaii would need to rise to $600,000 before Hawaii residents would be in the same affordability position, compared to the wages and inflation during the height of the last real estate bubble. "We are a long way from San Francisco," Brewbaker says.

That certainly is in line with what the executives at Schuler Homes believe. Flood says Schuler, a DR Horton subsidiary, built 320 homes in Hawaii in 2002 and plans to build 430 in 2003 and 500 or more the following year. Flood says, "There is an enormous demand out there."

Number of Building Permits in Hawaii: 1997 to 2001

Value of Building Permits in Hawaii: 1997 to 2001

Source: county building departments by the Hawaii State Department of Business, Economic Development & Tourism

THE LOWEST BID WINS THE JOB
The construction business is a time-honored tradition. In the past, if your company had a bond, insurance, a decent track record and the lowest bid, your company would be awarded the project. Not so anymore, says Lance Wilhelm, a project manager at Kiewit Pacific and the president of the General Contractors Association of Hawaii. An increasing number of public contracts in Hawaii now consider a number of criteria, including past experience, reputation, ability to complete work on time and on budget, and general management skills.

"There are a lot of things they take into account, and low bid is only one," Wilhelm says. He further notes that most of the military residential housing contracts now coming down the pike in Hawaii will be decided that way.

General Excise Tax Base for Contracting: 1991 TO 2001

Source: Hawaii State Department of Taxation, General Excise and Use Tax Base (annual)

The rise of new bidding criteria has long been predicted, but it could bring about real changes in the Hawaii construction industry. Companies could face more penalties for past mistakes. For example, the contractor who built the mold-plagued Hilton Hawaiian Village Kalia Tower might receive a black mark in future bidding processes. Larger contractors could also gain advantage simply because they might be able to fulfill broader criteria, such as post-completion management and sales capabilities mandated by some of the new military housing jobs.

ALL HOME BUILDING IS GOOD HOME BUILDING
Yes, the boom in construction is filling tax coffers and providing thousands of jobs. However, according to many industry insiders, the black market (unlicensed contractors) for residential construction in Hawaii has hit all-time highs. Unlicensed contractors usually collect cash for their work, and the cash never shows up on tax rolls.

The state has no estimate of how much construction of this nature occurs. However, black-market work is particularly prevalent on the Neighbor Islands and could be anywhere from 20 percent to 50 percent of all private residential construction projects.

"Pick up permit listings, and you’ll see 50 percent of the projects are owner-builder. A lot of those are being done by unlicensed contractors," says Denny Sadowski, chief executive officer of CO-HA construction and head of the Building Industry Association’s Government Relations committee. Sadowski says he cannot compete with unlicensed builders who pay no taxes. Thus far, the state has made no effort to crack down on these renegades, even though it may be costing millions in lost tax dollars each year.

Honolulu Construction Cost Indexes: 1991 to 2001

Source: First Hawaiian Bank, Research Department, records; Hawaii State Department of Business, Economic Development & Tourism, Research and Economic Analysis Division, records

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