Building a Boom

The construction industry my be the real bang behind the Islands' economic boom

September, 2006

Construction cranes are everywhere. Much of the Island’s infrastructure is being built and expanded: roads, harbors, airfields, sewage and water systems, as well as an extension of a fixed-rail mass-transit system that links much of West Oahu to Honolulu’s urban core. In a little more than a year, real per capita income will increase by 30 percent. In a matter of months, there is a sudden and severe labor shortage.

Oahu in 2006? 1986? 1966? Sort of. Maybe. Could be.

Constructing a War Machine

Before the flood of California dot-com cash in the late ’90s, the Japanese bubble economy in the mid ’80s, and even the arrival of the jetliner and its jet-setting tourists in the ’60s, Hawaii experienced its largest economic expansion on record beginning in 1939, when billions of dollars flowed into the Islands over a five-year period. This boom began with the decision to relocate the Pacific Fleet from Southern California bases in San Pedro and San Diego. With relations between the United States and the Empire of Japan deteriorating dramatically in the late ’30s, Oahu, specifically Pearl Harbor and its surrounding airfields and bases, became America’s new front against fascism.

Suddenly, in a matter of months, more than 160 warships and support ships were transferred to Pearl Harbor, bringing with them more than 50,000 crewmen calling Oahu home. To accommodate these men and their ships and to expand and fortify the existing bases of America’s “Gibraltar of the Pacific,” huge public works and housing projects went up all throughout the territory.

According to Gwenfread Allen, in her book, “Hawaii’s War Years: 1941-1945,” in 1940, U.S. Army and Navy construction expenditures exceeded $60 million, a 50 percent increase from 1939. In 1941, that number quadrupled to $240 million. After the bombs fell on Pearl Harbor, those expenditures increased exponentially. Meanwhile, the territory’s population exploded, from 429,000 in 1940 to 858,000 in 1944.

“It was a time of a great infusion of massive amounts of American money, probably as much as a billion dollars in overall spending before the attack on Pearl Harbor and many times that in the years that followed,” says Daniel Martinez, park historian at the USS Arizona Memorial. “Oahu was a beehive of activity. Over this period, Pearl Harbor tripled in size, Honolulu Harbor doubled, Schofield Barracks doubled, Hickam [Airfield] doubled and Wheeler [Airfield] and Kaneohe [Marine Corps Base] doubled. If you look closely at photos of the bombing of Pearl Harbor, you can see construction cranes in the background. There was building going on everywhere. After the attack there would be much much more.”

Construction: the Foundation of the Economy

The 1940s building boom has been unmatched in Hawaii’s history, until now.

The latest construction upswing started in fiscal year 1999, with the appropriation by the federal government of a then-record $248.7 million for military construction projects. The spending package was a 31 percent increase over 1998 appropriations and included more than $62 million in facilities and housing construction at Schofield Barracks, as well as $29.1 million for housing construction at Pearl Harbor and $27.4 million for bachelor enlisted quarters at Kaneohe Marine Corps Base Hawaii.

At the time, the release of money was hailed by First Hawaiian Bank economist Leroy Laney in a June 16, 1998, article in the Honolulu Star-Bulletin as “one of the few bright spots in Hawaii’s overwhelmingly bleak economy.” The article went on to say that the money was especially welcome, because “construction is one of the weakest parts of the economy and because the spending will be concentrated in Oahu, the hardest hit of the islands.”

Federal Spending on Military Construction in Hawaii
source: Office of U.S. Senator Dan Inouye

Since then, record spending has been the norm, reaching a high of $382.8 million in 2002. Spending has since vacillated from year to year, reaching a high of $368 million in 2005 to an expected low of $208 million for fiscal year 2007.

Meanwhile, beginning in 2004, the armed services’ privatization of military housing has provided a nearly $2 billion shot in the arm to the construction industry. There is even more growth over the horizon: The Navy continues to study the possibility of home porting one of its 12 aircraft carrier battle groups in Hawaii. Last month, Air Force officials announced that they are contemplating basing 11 of the advanced F-22A Raptor jet fighters at Hickam Air Force Base in 2011.

The construction industry hasn’t been able to catch its breath in several years. According to the University of Hawaii’s Economic Research Organization’s (UHERO) April 2006 construction forecast, taxable contracting receipts have risen 28 percent, from $4.5 billion in 2004 to $6.2 billion in 2006. In 2007, UHERO expects that number to increase by 4 percent, to $6.5 billion. In addition, construction income has climbed 36 percent, from 2004’s $2.1 billion to 2006’s $3.1 billion. The industry’s job count increased from 27,950 in 2003 to 34,680 in 2006, and it will continue to grow for several more years. In its Construction Workforce Action Plan, the Hawaii Institute for Public Affairs estimates that the construction industry will need 9,400 workers between 2004 and 2012, or about 1,174 workers a year.

Today’s building boom isn’t only about the military, far from it. Private building permits have more than doubled, from $1.5 billion in 2000 to $3.5 billion in 2006. Residential permits have nearly tripled, from $800 million in 2000 to $2.26 billion in 2006.

Lawrence Boyd, a labor economist with the University of West Oahu’s Center for Labor Education and Research, sees a familiar pattern in the Islands’ latest building boom. All four of Hawaii’s economic upswings (1939 – 1944, 1959 – 1971, 1986 – 1992 and 1998 – present ) were fueled by large influxes of capital invested into construction, whether it was military bases and infrastructure, housing, or hotels and other high rises in Waikiki, Makiki and beyond. Tourism may be the economic engine that keeps things humming along in the Islands, but it is construction (especially when it is paired with military spending) that sends things into overdrive.

“People need to realize that the Hawaiian economy isn’t very big. The labor force is roughly 600,000 people, and it doesn’t take much to wipe out unemployment. Two new cruise ships lowered the rate by 2 percent,” says Boyd. “This sort of rapid growth is a phenomenon that you usually see in municipalities such as New York City or San Francisco. Since we are such a small state dominated by one city, we’re a sort of ‘city state,’ and like a lot of cities, our primary form of investment is construction.”

According to Boyd, an ignited construction industry is a potent stimulus, because it is an efficient and relatively quick way of getting dollars into the local economy. A high percentage of local ownership among contractors in the state means that more dollars stay in the Islands, and a high average wage in the industry means that those dollars end up in working people’s pockets. According to the State of Hawaii Data Book, in 2003, the average annual wage for construction workers was $49,549. It was the fourth-highest wage in the state behind utilities ($70,667), federal government ($52,229) and finance and insurance ($50,943). The state’s average wage was $33,735 in 2003.

Hawaii Real Per Capita Income
source: UH Center for Labor Education and Reasearch

In addition, according to Building Industry magazine, of Hawaii’s 25 largest general contractors, 16 are locally based. Moreover, most of the remaining nine companies work extensively with local subcontractors. “Our staff lives and works here and if you go out to one of our job sites you’ll typically see about 70 percent of the workers are from local subcontractors,” says Lance Wilhelm, senior vice president for the Omaha-based Kiewit Building Group, which had 2005 gross revenues of $36 million. “The overwhelming majority of the money that we earn here, stays here.”

According to Actus Lend Lease officials, the Napa Valley, Calif.-based construction company executed $87 million in contracts from April to June 2006, all of them with local companies. Since October 2004, Actus has executed $237 million in contracts, 97 percent of which are with local companies.

According to Boyd, for every dollar spent on construction, an additional $1.80 is generated in the Hawaii economy. The multiplier for the tourist industry is $1.40.

“If you compare total dollar contributions, construction is third behind the military and tourism, so it’s often overlooked,” says Brian Lee, communications and research specialist with the International Brotherhood of Electrical Workers Local 1186. “But maybe three-quarters of the workers at any job site are local, even for the big general contractors, so that means three-quarters of the money is being circulated into the economy.”

Real Gross State Product Construction Expenditures
source: UH Center for Labor Education and Research

Booming and Busting

One of the problems of having an economy that gets so much of its fuel from construction is that it is subject to the industry’s cyclical and volatile nature: world wars end, interest rates rise and economies fall. After Japan’s surrender in 1945, demobilized personnel left Hawaii for the Mainland, taking their dollars with them. The Islands’ economy stagnated and real per capita personal income declined at an annual rate of 5.7 percent between 1945 and 1949. In June of 1950, the Korean War began and, over the course of the next eight years, military personnel in Hawaii more than doubled from 21,000 in 1950 to 50,000 in 1958.

Luckily for Hawaii, the current construction cycle is built on a firmer foundation.

“We should see steady growth in the construction industry at least through 2008, after which we’ll have a leveling off in activity before things start to gradually fall off,” says Sang-Hyop Lee, labor economist with the University of Hawaii at Manoa. “We shouldn’t have a hard landing this time. Residential housing construction will be sluggish with rising interest rates, but military and commercial construction should stabilize things.”

Ironically, for Boyd, what may be the biggest threat to Hawaii’s fragile standard of living may be more prosperity. In other words, another building boom starting before the current one runs its course. Today, housing prices, which are stabilizing, are still high and affordable housing is seemingly nonexistent. Meanwhile, prices throughout the economy are steadily climbing. Boyd believes that if another boom (i.e. the home porting of an aircraft battle group, which the National Parks’ Service’s Martinez estimates would be the economic equivalent of the 1940 arrival of the Pacific Fleet) hits before our current one winds down, Island consumers will be hit by an economy out of control.

“If things go to s–t and a carrier comes to town, then that will be great. We’d need more housing and infrastructure to handle all the new ships, and our economy would pick up again,” says Boyd. “However, if things are still going good economically, I’m not sure how we’d be able to handle all that growth and extra demand. Prices would go through the roof. As an economist, you’d like to see things flatten out and stabilize for as long as possible. But that never seems to happen.”


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