How Long Can The Honeymoon Last?

Industry leaders see challenges ahead

August, 2005

When Hawaii Business set out to talk with local business executives about the growth of the local economy in 2004, we went straight to the top – of the list, that is. After all, financial institutions, such as the No. 1-ranked BancWest Corp., are often good barometers of the general health of the communities they serve. If that is the case, the state of Hawaii, like BancWest subsidiary First Hawaiian Bank, enjoyed a year of robust growth across the board.

“2004 was a very good year for us all around,” says First Hawaiian Bank President and Chief Executive Officer Don Horner. “Our deposits grew 8 percent. We saw an 8.9 percent growth in loans – most of that was a result of small-business lending, but part of that was also real estate lending. I think between the two, we enjoyed almost double-digit growth in loans and deposits. We also had – and keep in mind I’ve been at the bank for over 25 years – the lowest delinquencies I’ve seen in my history with the bank. So in many ways it was just a very good year for us.”

First Hawaiian wasn’t alone. In 2004, the total sales for the state’s Top 250 companies grew 6.9 percent year over year, from $31.63 billion to $33.82 billion. Keep in mind, that’s on top of a 5.1 percent increase in total Top 250 sales the year prior. In fact, after what was, in some ways, a minor aggregate slowdown in the two years following Sept. 11, total sales have risen to just below their peak level of $33.95 billion in 2000, and there’s every indication that it will surpass that figure in 2005.

“That’s not surprising,” says University of Hawaii Economic Research Organizia-tion (UHERO) economist Byron Gangnes. “The state economy’s been adding jobs and growing income since at least 1999. So we’re really into our sixth year of expansion. And that accumulation of new jobs and increasing purchasing power for workers is supporting a very broad economic growth.”

One need look no further than the Top 250 list for a clear depiction of broad economic growth. With the exception of the insurance and agriculture industries (which had overall sales decreases of 1.7 percent and 1.8 percent, respectively), every major industry represented on the Top 250 saw positive revenue growth in 2004. From wholesaling and distribution (2.4 percent growth) to the conglomerates (18.6 percent growth), virtually every sector of the local economy came up roses (see Industry Sectors list on page 107).

“In almost every year before 2004, you could always point to one sector that wasn’t having a good year, but now, everything is sort of on the same page,” says Paul Brewbaker, chief economist at Bank of Hawaii. “For the first time, since we started this expansion in the late ’90s, across virtually all sectors, and across all islands, all at the same time, there are high levels of economic activity and solid growth rates. Everything from the large and the obvious, to the small and the obscure, seems to be participating in this economic growth.”


Well then, let’s start with the large and the obvious. According to the Top 250, the real estate industry’s total sales rose 6.6 percent over last year, but as anyone who witnessed (or was involved in) the local real estate craze will attest, that number doesn’t quite reflect the actual frenzied state of the market. That’s because real estate and mortgage firms report commissions, not sales volume, for inclusion in the Top 250 list. So, for example, although Top 250 newcomer RESCO Inc. (dba Prudential Locations LLC) reported annual revenue growth of just 5 percent last year, its actual sales volume increased 33 percent, from $807 million in 2003 to $1.07 billion last year.

“What we’re seeing is an environment when commission rates, on average, are dropping across the state. Because of the phenomenon of discount brokerages and brokerages giving discounts to people doing multiple transactions, commissions are dropping year over year,” says Scott Higashi, executive vice president of sales for Prudential Locations. “But while commission rates are falling, volume has, and continues to be, very strong.”

According to the Honolulu Board of Realtors, last year, total sales of single-family homes and condominiums on Oahu increased 13.1 percent and 14.2 percent, respectively. The median price for single-family homes jumped 21.1 percent (from $380,000 to $460,000), while condo prices rose 19.1 percent (from $175,000 to $208,500). Activity on the Neighbor Islands was even more brisk. By December 2004, Kauai’s median sales price for a single-family home had reached a whopping $575,000, up from $441,000 the year prior, and Maui’s median price jumped from $515,000 to $594,500 during the same period.


Suffice it to say, when real estate’s doing well, so is construction. Just because this year’s 29 construction companies collectively reported less than a 3 percent increase in gross annual revenues, it doesn’t mean they weren’t busy, or profitable. As Bill Wilson, president of the No. 22 firm, Hawaiian Dredging Construction Co., puts it, “Revenue growth is hard to control in construction. You’re never quite sure when jobs are going to start or end.” His firm’s revenues substantiate that theory, having dropped 7.5 percent in 2003, and then rising 41 percent last year. Dick Pacific Construction Co. Ltd., on the other hand, saw a 16.2 percent drop in revenues last year, following a 12.3 percent revenue increase in 2003 and a staggering 33.9 percent jump the year prior, giving more teeth to his theory.

But one thing both companies – and nearly every other construction firm in the state – do have in common is enough spillover work from 2004 to keep them busy well into 2005 and beyond. According to the Department of Business, Economic Development and Tourism, the total value of the state’s residential and commercial building permits rose 16 percent last year, from $2.35 billion to $2.73 billion.

“All the big contracts to renovate military base housing are ramping up this year, and then they will be at a high level of activity through the end of the decade,” says Gangnes. “Then there’s been a lot of residential construction on all of the islands, and there continues to be a lot of new permitting activity, so it’s clear there’s still room for more residential construction over the next couple years.

“So there’s clearly enough work to go around. The bigger issue that I think we’re already seeing is going to be finding workers,” he says. It’s a problem that other industries are contending with, too.


By all accounts, 2004 was a banner year for Hawaii’s tourism industry. Not only did everything from room revenues to visitor arrivals rise to near-record or record levels last year, but Hawaii also fared better than every other state in the nation in terms of room and occupancy rates. According to consulting firm Hospitality Advisors LLC, Hawaii’s average room rate last year (which increased $7 over the year prior, to a record high of $151 per night) was the highest in the country. Hawaii’s 2004 average occupancy rate of 84 percent was also the best in the nation.

Total visitor arrivals also rose significantly, from 6.38 million in 2003 to 6.91 last year. Furthermore, DBEDT predicts visitor arrivals this year will hit a record high of 7.2 million. Travel to the Islands was (and continues to be) so robust, in fact, that many in the visitor industry are rethinking the way they do business.

“There seems to be, in the transient accommodations, quite a dramatic and sustained build out of new timeshare units and conversions of existing hotel units into condominiums and timeshares,” says Brewbaker. Most of the major hotels on the Top 250 list experienced revenue increases last year as a result of new and expanded timeshare activity, and many of them are still currently building out their inventories.

No. 20-ranked Starwood Hotels and Resorts Hawaii is a prime example. In 2004, Starwood had a hefty 57.7 percent growth in revenues, from $227 million to $358 million, in part because of increased sales of The Westin Kaanapali Ocean Resort Villas (KOR), a luxury timeshare resort it opened on Maui in late 2003. Starwood is also currently planning the build out of the second phase of KOR, as well as The Westin Princeville Ocean Resort, scheduled for opening in early 2007 on Kauai.

Outrigger Enterprises, which ranked No. 16 this year, with $449.5 million in gross revenues, has got plans for both conversion and new timeshare developments at its $460 million Waikiki Beach Walk project. Although Marriott International doesn’t have any immediate plans for additional timeshare development (Marriott executives say the company is targeting 2006 and 2007 to begin further expansion), its 13.9 percent revenue growth was due, in part, to healthy sales of its current Vacation Club properties: The Maui Ocean Club, Kauai’s Waiohai Beach and Kauai Beach clubs and the Ko Olina Beach Club.

UHERO’s Gangnes says the trend of timeshare development is not specific to Hawaii. “There isn’t any new hotel development to speak of, and that’s true globally. Hotels are just not considered to be profitable right now. But timeshares have been,” he says, adding that most of the growth in new room stock will likely be in the form of timeshares. “Now, in some sense, new rooms are new rooms. It still allows us to have growth in number of visitors and how long they can stay. But one of the advantages of timeshare visitors, as we saw after 9/11, is they tend to be more stable in the face of uncertainty. So that could be a stabilizing influence in coming years.”

In addition to stability, Starwood’s senior vice president and director of operations, Keith Vieira, says timeshares enable hotel and resort owners to build brand loyalty with a whole new market of travelers. “There’s such a desire in the U.S. for branded product, even on the hotel side. Properties like the Westin and the W have created this lifestyle demand, where people are willing to say, I stay at this kind of hotel, I want to live there,” he says. “So we think the days of just the typical hotel alone being built will be significantly less than in the past, and that mixed-use properties combining residential condos and timeshare along with hotels will be a definite future growth mechanism for us in Hawaii.”


Despite what appears to be across-the-board economic growth last year, six Japan-based former Top 250 companies fell off this year’s list, including Obayashi Hawaii Corp., Princeville Corp. and R&C Hawaii Tours Inc. Experts say, however, that drop off was mainly a result of the gradual divestment of Japan companies’ local assets at a time when Hawaii real estate prices made it favorable to do so.

“The pattern is that some of the last remnants of the earlier ways of Japan investors, and principally tourism-related investors, have either disposed, finally disposed or completed an extended period of asset disposition, which has rendered them off the [Top 250] list for one reason or another,” explains Brewbaker. Additionally, some companies may have been displaced from the list because big sales were in the works during the time we surveyed the companies for inclusion.

For example, Suntory Ltd., Mitsui & Co. Ltd. and Nippon Shinpan Co. Ltd. (the Japan owners of Princeville Corp., which in 2003 ranked No. 125, with revenues of $56 million), announced the sale of the Princeville Resort to Honolulu-based Princeville Associates LLC in March of this year. At the same time, speculation mounted that Prince Resorts was gearing up to put its four local properties on the market as its parent company, Seibu Railway Co., underwent a massive corporate restructuring. Both companies were displaced from this year’s Top 250 list.

“I don’t think it’s necessarily that the Japanese are trying to get out of the market,” says Starwood’s Vieira. “I think with the escalation in real estate prices, and with so many U.S. investors looking for investment opportunities, it’s sort of at a nice crossroads where these sales are a benefit to both sides.”

Not all Japan-based companies were downbeat. Of the 15 Japan companies that did make the list this year, only two had declining revenues in 2004; the rest all managed to increase their gross revenues over 2003. Furthermore, some experts say we are already beginning to see the inklings of a newer generation of Japanese investors in the Islands. “We have seen a new investment by Japanese firms into venture such as Hawaiian Deep Sea Water, with one company, Koyo USA, winning the governor’s award for exporting this past year,” explains Dave Erdman, president and CEO of PacRim Marketing Group. “And we’re also seeing an influx of new restaurant ideas and exciting concepts coming into Hawaii from Japan. These firms will not make the Top 250, but they will be important contributors to our economy.”


As the saying (and all economies) goes, what goes up must come down. So with virtually every sector of the local economy having gone gangbusters in ’04, and nearly every indication that this trend will continue through ’05, people are wondering, “How long will this growth last?”

Most industry sectors will continue to grow at least through 2005, but each one faces its own unique challenges and constraints, some of which overlap. All industries, for example, (although it’s most evident in the construction field) are under constant pressure from Hawaii’s extremely low unemployment rate, which averaged 3.3 percent in 2004 and, by the second quarter of 2005, had dropped below 3 percent – the lowest in the nation.

In addition to workforce concerns, many top business executives are also worried about the brisk pace at which housing prices continue to skyrocket – an issue they say may ultimately give rise to costly social problems, as the middle class gets pinched out of the market. “Frankly, as a banker, I am concerned about the pace of appreciation in real estate,” says Horner. “It’s to the point where local people can’t afford a home and in the long run, that will dampen the overall economic expansion.”

Perhaps the biggest constraint to growth is capacity. We simply can’t sustain this type of growth without maxing out everything from our aging roads and infrastructure to our visitor plant inventory. “Capacity is a fairly strong constraint to growth here in a lot of ways. We’re going to run into social capacities in terms of how many people we want here. We’re going to run into physical capacities in terms of traffic. We’re going to run into infrastructure capacities in terms of water and sewage,” says W. Allen Doane, president and chief executive officer of the state’s fourth-largest business, Alexander & Baldwin Inc. “The challenge for us moving forward is to get to a middle ground where we can still have growth, but also sustain the quality of life. Because I think at a very high level, we want to have growth, but we want quality growth, not quantity growth – and that’s going to be the challenge going forward.”

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Jacy L. Youn