Bid It and They will Come

The Islands are witnessing an influx of construction firms seeking a piece of the fast-growing building industry

September, 2004

In the 1970s, the Hawaiian Islands were awash in big-ticket construction projects fueled by Mainland cash. Dozens of Mainland general contractors set up shop in the Aloha State to catch a piece of the soaring market. One of the most prominent among them was Swinerton Inc. The 116-year-old firm first landed on these shores in 1961, after it won the bid to build the Maui Sheraton in Kaanapali.

Over the succeeding three decades, Swinerton was the general contractor for dozens of large projects, including the Sheraton Waikiki, the Hyatt Regency Waikiki, the Yacht Harbor Towers, the Princess Kaiulani, the Admiral Thomas Condominiums and the Financial Plaza of the Pacific. During the 1980s and 1990s, work waned and the company shut down its Hawaii offices.

The lights are back on at Swinerton. In 2002, it won the $12-million contract to build a Lowe’s Home Improvement Center in Kailua-Kona. Then, in October 2003, Swinerton reopened Honolulu operations as Swinerton/Pacific, a joint venture with well-established local construction firm U.S. Pacific. Swinerton/Pacific is working on the $40-million Alexander & Baldwin condominium project off Kuhio Avenue in Waikiki. Led by Hawaii project manager George Ehara, Swinerton now has 12 dedicated staffers in the Islands and is looking to hire at least three more.

Swinerton’s move into Hawaii is part of a broad corporate strategy to geographically diversify this $2-billion firm, which is the 27th largest construction company in the United States. However, this time, Swinerton plans to put down roots and stay for good. “A lot of our volume last time was high-rise projects. That market dried up in the early 1980s, and [this time] we have a much more diversified business plan coming into this market,” says Ehara.

LANDING IN PARADISE

Swinerton is hardly alone. In fact, boatloads of outside contractors are now piling back into the red-hot Hawaii market. “They are seeing that Hawaii’s construction is going to be on a rise for the next five to 10 years. They see it as an opportunity,” says Bruce Coppa, executive director of the construction-union advocacy group Pacific Resource Partnership. The action has been nonstop since 2002. D.R. Horton snapped up Schuler Homes early in that year. Later that year, the Japanese conglomerate Kajima finalized the buyout of venerable Hawaiian Dredging Construction Co., a perennial top-three construction firm in the Islands.

A parade of others has followed. Denny Watts has already started winning work for Richmond, Calif.-firm Miller/Watts Constructors in Hawaii. (See story on pg. 21.) A half-dozen big Mainland residential construction firms, such as Cleveland-based Forest City Enterprises (NYSE:FCEA and FCEB), with $1 billion in annual revenues, have also swum ashore. Most, such as Swinerton/Pacific, are partnering with local players or hiring local executives to give them entrée into the tight-knit subcontracting community here. “There is a whole shift with regards to the opportunities. There are a bunch of new names that will come in with the old names. That’s what boom markets do,” says Watts.

THE LONG BOOM?

While most construction executives hesitate to voice the “b-word,” it is looking more and more like Hawaii has a boom. The last time so many new faces showed up to build in Hawaii, the party ended abruptly and badly when the Japanese bubble burst. No surprise, then, that this time around, contractors are picking and choosing projects and planning their expansions with an eye toward sustainability. “Most of those people who survived the Japanese bubble became a lot wiser and smarter,” says Watts.

Still, few fear that the construction market will grind to a rapid halt. That’s because this is shaping up to be the most diverse construction upswing on record. Residential construction fueled the first wave of building. According to state economist Pearl Imada Iboshi, “The bulk of the increase in construction in the past few years has been in housing.” Since 1999, the dollar value of residential housing permits has increased 20 percent every year, with the exception of 2001 and its tourism downturn. Even in that terrorism-scarred year, residential-housing permits still climbed a respectable 10 percent.

Low home mortgage rates, low prices compared to the West Coast and pent-up demand for a place whipped residential buyers into a furious lather that has yet to abate. Median home prices have climbed steadily on all four major islands, and the condominium market has followed suit. That could slow down in the next year due to higher interest rates, says Iboshi. While steadily rising home values have fueled more construction, the virtuous cycle could well be short-circuited by nosebleed valuations. High prices have put homes out of reach for most locals. This is particularly true on Maui and Kauai, where the median home price now eclipses $520,000. It is likely only a matter of time before those markets slow.

SPINNING THE CYCLE

Even as residential construction inevitably starts to slow, other construction sectors wait in the wings. Military construction, with big-ticket projects coming in massive housing and renovation efforts worth billions of dollars over the next decade, looks like it will provide a steady revenue stream, with minimal chance for interruption. At the same time, increased tax dollars at the state and county levels should fuel construction as those entities finally fund much-needed infrastructure improvements.

On the retail front, developers continue to seek to update and replace the numerous outdated malls and shopping areas in Waikiki and around the state. Meanwhile, big-box operations, such as Lowe’s, Wal-Mart and Home Depot, continue to pile into the Islands. The unofficial state bird (the construction crane) has returned to Honolulu, with copious condo projects now rising on the Kakaako-Kapiolani corridor.

Commercial construction permits doubled in value from $254 million in 2002 to $508 million in 2003. The University of Hawaii Economic Research Organization (UHERO) expects the total value of the construction activity to increase at an astounding 17.4 percent clip in 2004, up from a more leisurely but still strong 7.3 percent growth rate in 2003. The activity could push Hawaii construction permit activity to the $5-billion mark and beyond by the end of 2004, well up from the sector value of $4.6 billion in 2003. What’s more, the UHERO estimates do not take into account the large military housing contracts let in the spring of 2004. Add those into the mix and Hawaii’s construction industry could well see double digit growth for several years to come.

No, the new boom is not like the old boom. “So much of what I saw in the 1980s was tourism-related work. While there has been time-share work, there hasn’t been a lot of hotel work. I think we will see more of that. But we have all the planned retail activity in Waikiki. You have a higher level of military construction today. The bioscience development activity in the Kaakako area will expand. All of this will yield a stronger economy over time,” says Bill Wilson, chief executive officer of Hawaiian Dredging Construction Corp.

SCARCE LABOR

There is a big “if” – if companies can find enough bodies to staff their sites. For the most part, the projected labor shortage remains in the future. According to Coppa, there are still carpenters on the benches at union headquarters. But Coppa and others peering ahead see that a shortage is inevitable. Already a big squeeze is underway in specialty trades that have fewer practitioners. What’s worse, ratcheting up the quantity and quality of the workforce takes time. Most training programs for trades run a year or longer.

The learning curve in the field can mean another year or more before a new worker gets up to speed and is pulling his or her full weight on projects. There will likely be a significant lag between the call to action to produce more construction workers and the reality of when these workers actually hit their full potential and begin making a real difference on company bottom lines. “Whether you make money or lose money on a job depends on your labor and how fast they are. A guy coming out of school isn’t going to be as fast or as experienced. You can’t teach someone to be fast in school,” says Grant Maeshiro, project manager with specialty electrical contractor Island Signal & Sound.

With Hawaii’s unemployment rate ranking as the lowest in the country and employers across the spectrum seeking good help, employers may have difficulty enticing young workers into a trade that has been stigmatized by the past boom-and-bust cycle. “You have to buy off guys from other occupations. You have to induce people to move here from places where the costs might be less,” says Paul Brewbaker, chief economist for Bank of Hawaii.

According to Iboshi, construction jobs have risen since 1999 from less than 23,000 jobs to nearly 28,000 jobs in 2003. “For the first five months of 2004, construction jobs increased by 5 percent as compared to the same period last year,” she adds. That rate of increase outstrips the state’s overall employment growth rate during that period by a wide margin. And it partly explains why construction salaries are rising at a 5 percent to 7 percent annual clip, much faster than the average salary growth for the state.

NO FREE LUNCH

There is, of course, a bit of dark lining to go along with the silver clouds. Noticeably absent in the current boom is office tower construction. With vacancy remaining in the 12 percent to 14 percent range in downtown Honolulu, the demand for more space simply does not exist. Says Bankoh’s Brewbaker, “Office towers are just not going to happen this cycle.” That seems odd considering the current economic expansion. However, Brewbaker believes the office-tower market is suffering from structural shifts that have induced more companies to allow workers to telecommute and warehouse fewer bodies in cube farms on Bishop Street. “If you walk around downtown and talk to the old, big employers, you will find they are all smaller and there are more computers on their desks,” says Brewbaker.

Another absentee from this cycle to date has been industrial construction. Investors have been reluctant to push these types of projects in Hawaii due to the thickets of regulations they must face and the lack of convenient industrial development space. The big-box stores that have replaced many mom-and-pop establishments don’t buy from wholesalers or get shipments from their warehouses. They accept shipments straight from the docks. However, with industrial vacancies hovering in the 3 percent range, the market could start moving soon.

The specter of higher construction costs, too, could slow down the growth of the sector. Insurance costs continue to soar as general underwriters reassess their actuarial tables and try to recoup losses from 2001 and 2002. In many cases, general contractors face liability insurance costs that have doubled or tripled over the past four years. Materials costs also are rising very quickly in Hawaii in steel, plywood and other products. Further, the high world oil prices could ultimately force shippers to raise their rates, a cost that will pass through to the construction industry.

Slime is also a possible cause for higher prices. Contractors are watching with trepidation as the Hilton Hawaiian Village pursues its case to recover damages resulting from mold outbreaks in the newly constructed Kalia Tower. “Hawaii was a little behind the curve in terms of mold litigation developing as a trend, but with the occurrence at the Kalia Tower, plaintiffs’ attorneys are now attuned to looking for mold damage as a possible additional claim in what otherwise would have been a traditional construction defects case,” says Harvey Lung, a partner at Bays Deaver Lung Rose & Baba.

Since insurance companies have long refused to cover mold on their general liability policies and mold litigation is a favorite of some personal-injury attorneys, contractors fear that mold claims could force them to raise prices to account for this relatively new type of risk. The upshot? Despite the strong market forces driving the boom, upward pressures on costs for construction firms will make profit margins tighter and possibly slice a significant piece off the upside portion of the growth curve. Even so, the basic picture for the industry going forward is rosy at worst and exuberant at best. It’s a good time to wear a hard hat in Hawaii.

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