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Arrested Development

Global credit crisis hits Hawaii

(page 1 of 2)

Allen Leong, KC Rainbow Development,
says the lack of presales has all
but stopped work on the company's
latest condo project.

It’s tempting to believe the map. To run your finger over the blue swath of the Pacific and imagine that these are islands. But the turmoil in the world’s financial markets has demonstrated that Hawaii’s isolation is an illusion.

Our economy — particularly capital-intensive sectors like real estate development and construction — has become dependent on access to money from the Mainland and abroad. And the long string of failures in the financial community — Washington Mutual, IndyMac, Bear Stearns, Lehman Brothers — has cut deeply into the availability of that capital.

Some failures have affected Hawaii directly: The Ritz-Carlton development at Kapalua was nearly derailed when Lehman Brothers, the lead bank, went bankrupt last year. Similarly, the credit problems of General Growth Properties have halted construction at its Ward Villages project in Kakaako. But more damaging has been the complete collapse of the market for the Commercial Mortgage-Backed Securities and other financial instruments that have been the conduit for most of the Mainland capital underpinning development in Hawaii over the past six years.

The Return to Local

“Sixty percent of all loans were through the CMBS market,” says Mike Hamasu, director of consulting and research at Colliers Monroe Friedlander.

“The majority of that is now frozen.”

The result has been an exodus of Mainland lenders — with boggling effect. “I can give you our preliminary findings for last year,” Hamasu says. “In 2007, total sales for the state came to $3 billion. Our prediction for 2008 is $780 million,” an astonishing 74 percent drop. This year will be even lower: “We’re anticipating sales of only $580 million in 2009,” he notes.

One of the signature effects has been the emerging dominance of local banks. Central Pacific Bank, for example, came forward to replace Lehman Brothers as the lead bank in the Ritz-Carlton development on Maui. Most developers indicate that deals will now have to include local banks. The change is not an idle one; Hawaii’s local banks have a reputation for conservative underwriting. For developers, this means much higher equity requirements; no non-recourse loans; and, critically, higher presale and prelease requirements before the borrower can access construction loans. All of which are more difficult in a recession.

Presales Are Crucial

For Allen Leong, director of operations for KC Rainbow Development Co., the crisis in the world capital markets is neatly bracketed by two projects along Kapiolani Boulevard: the twin towers of Moana Pacific, completed in early 2007, and the Moana Vista, started in 2007 but still unfinished and awaiting new capital.

“The issue with Moana Vista is the basic issue of every single real estate project: presales,” he says. “At the Moana Pacific, the first tower sold out within six months. The second tower might have taken nine or 10 months to sell out.” Presales of the 492-unit Moana Vista began in 2007, amid much the same atmosphere of optimism and enthusiasm. Hundreds of people showed up when units first went up for auction. “At one point in time,” Leong says, “I had 300 units sold.” But the stream of bad economic news sapped the confidence of buyers, and more than half canceled their contracts.


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