The Big Picture

Low interest rates helped ignite the state’s long-dormant construction and real estate sectors, just as the state’s volatile visitor industry started to warm up

August, 2004

Cowboy boots and 10-gallon hats are part of the dress code for executives at the Hilo-based David S. De Luz Sr. Enterprises. “We’re not like businesses in Honolulu,” says De Luz chief financial officer, Victor Trevino. “We’re a different kind of breed here on the Big Island.”

New breed, indeed. Trevino helps oversee the growing poi dog that is the De Luz empire, which encompasses dealerships for Toyota, Suzuki and Subaru in Hilo and Kona, two ranches with 2,500 head of cattle and 2 million board-feet of koa wood. In addition, in 2004, the company started a construction division to build houses on a few subdivisions it is developing. In all, De Luz, which has been ranked in Hawaii Business’s Top 250 for 20 consecutive years, has a varied real estate portfolio of 12,000 acres in Hilo, Hamakua and Kona. David S. De Luz Sr., who began his business career selling beef to sugar workers in Honokaa, has also owned a rental car company, raised rabbits for food and grown grapes, among many other ventures.

With cows, cars and construction in its stable of businesses, De Luz Enterprises is arguably the state’s most eclectic company and, in many ways, a sort of indicator species for the general health of Hawaii Business’s Top 250 companies, as well as the Islands’ overall economic environment. Last year was very good for De Luz Enterprises. The company’s gross sales jumped 91.5 percent, from $80.4 million in 2002 to $154 million in 2003, the second-largest percentage gain on this year’s list. The jump catapulted De Luz Enterprises up 39 spots to No. 44 on the Top 250, making it the second-largest-grossing Neighbor Island company on the list.

De Luz’s real estate division accounted for $50 million of the company’s gross sales, a more than 300 percent increase over 2002. Sales were good across the board, in everything from commercial properties in downtown Kailua, Kona, to 7- and 8-acre residential parcels in the hills above the Hamakua coast. Sales at De Luz Enterprises’ car dealerships were nearly as good. In 2003, the company sold $104 million worth of cars, a 36 percent increase from 2002. It was the largest sales increase in three decades and the first time in memory that both the company’s real estate and car divisions did so well at the same time.

“In April of 2003, we started to see an upswing in car sales that we haven’t come down from yet. Real estate was booming a year before that,” says Trevino. “We track the real estate market very closely. On the Big Island, when people buy residential lots, they often buy a car shortly thereafter. So, we started to offer a deal to homebuyers: If you buy one of our homes or lots, we’ll offer you a discount on a Toyota. Everything is just kind of working well together.”

Much like the microcosm that is De Luz Enterprises, many of Hawaii Business’ Top 250 companies and the state’s economy in general had a very good year. Historically low interest rates helped ignite the state’s long-dormant construction and real estate sectors, just as the state’s volatile visitor industry started to warm up.

“In 2003 and 2004, we had the good fortune of having an upswing in our construction industry at the same time as tourism is experiencing a healthy cycle,” says Byron Gangnes, researcher at the University of Hawaii Economic Research Organization (UHERO). “In turn, rising property values and good jobs have had spill-over effects. People have bought new homes, cars and other goods. They have remodeled homes. Refinancing and home-equity loans have put money into people’s pockets, and they have spent it.” (For more on Hawaii’s economic outlook, see the UHERO Report on pg. 186).

According to Gangnes, 2003 was one of the best years in the recent history of Hawaii’s economy, with both residential and commercial permits growing strongly: residential by 24 percent and commercial by 111 percent. On Oahu, condo resales were 28 percent higher for the year. Prices for single-family homes rose 13 percent in 2003, averaging a record $397,000 in the fourth quarter. By May 2004, that number rose to $445,000.

Meanwhile, tourism shrugged off the effects of the Iraq War and SARS hysteria and continued on its road to recovery, a reawakened mainland U.S. market almost making up for losses in the Japanese market. While visitor arrivals were down slightly compared with 2002, total visitor days, a crucial economic indicator, rose 3 percent.

State job counts have rebounded from a downturn after Sept. 11. The number of nonfarm payroll jobs rose by 2.2 percent in 2003. Construction jobs experienced the biggest growth, 6 percent over 2002 numbers.

“With heavy government spending over the next 10 years, Hawaii’s construction industry promises to be very, very strong. However, if tourism wasn’t as healthy as it is, the economy would be a lot slower,” says Gangnes. “In the early ’90s, there was a lot of hand-wringing about how Hawaii was a tired destination being passed over by other locations like the Caribbean. That looks a little silly in retrospect. In the post-Sept. 11 world, Hawaii is the tropical paradise that is safely within U.S. borders.”

In 2003, Top 250 companies had total gross sales of $31.63 billion, a 5.1 percent increase over 2002. It was the first increase since record-setting 2000, which saw the average sales per Top 250 company exceed $135 million. Real estate, with $630.9 million in gross sales, led all industries, with a 21.9 percent increase over 2002 numbers. Conglomerates, with Kamehameha Schools leading the way with $544.3 million in sales, had the second-highest growth in sales, at 20 percent. Energy was next, with 2003 sales of $565.2 million, a 15.3 percent increase over 2002 (see sidebar on page 34). Finally, despite rising fuel costs, air transportation companies logged in $1.26 billion in sales, a 14.1 percent increase from 2002. The positive gains were a stunning turnaround, since all the sectors had reported double-digit declines in sales a year earlier, except for energy, which enjoyed a 41.7 percent increase in 2002.

The Top 250’s tourism-related companies reported $4.03 billion in gross sales, down 1.9 percent from 2002.

Location, Location, Location

Companies in the construction, housing and real estate industries dominated the Top 250’s list of biggest sales gains. No real estate company on the list had a better year than Coldwell Banker Pacific Properties. In 2003, the real estate firm earned $39.1 million in commissions off of volume sales of $1.3 billion. Sales had increased an eye-opening 29 percent over 2002. These gaudy numbers put Coldwell, a first-timer to the Top 250, at No. 161 on the list. But every year has been good for the firm since it was founded in 1995. According to managing director Scott Bradley, Coldwell’s sales have grown an average of 15 percent to 20 percent every year for the past eight years.

“The market stayed pretty flat for our first three or four years,” says Bradley. “But then things started to firm up in 1998. By 2003, the market was running on a full head of steam. The Hawaii real estate market is either feast or famine, and right now there seems to be plenty to go around.”

According to Bradley, this real estate banquet is a much more affable affair than the feeding frenzy of the Japanese bubble years of the late ’80s. The drivers of today’s market cross nearly all sectors of the Islands’ economy: tourism, military spending and construction. While low interest rates and an influx of high-tech money from the West Coast sparked the latest land rush, which began in the late ’90s, the current boom is fueled now largely by local dollars.

“In the ’70s it was the Canadians who invested in real estate. In the ’80s, it was the Japanese who pushed up prices and, in the ’90s, it was the Californians,” says Bradley. “A locally driven market is a little unusual for us, but it’s fundamentally healthier.”

According to Bradley, sales have been strong throughout the market, but Coldwell has seen its biggest movement in $1-million-plus properties, a 95 percent increase from 2002. Surprisingly, most of the buyers of these homes are local residents. “Sales are good pretty much all over the Island. But we have so many desirable places that are in the $1-million area,” says Bradley. “People are just moving up.”

People just getting started have been active, too. Hawaii’s large homebuilders also had banner years. Gentry Homes sold most of its inventory of homes in 2003, earning $157 million, an increase of 41.4 percent, which bumped up the company from No. 34 on the Top 250 list to No. 41. Schuler Homes had an equally good year, reporting gross sales of $169 million, a 32 percent increase over 2002.

According to Bob Brant, Gentry’s chairman of the board, president and chief executive officer, the company’s successful 2003 was all about timing. In 2002, Gentry Homes, the pioneer developer of the Ewa Plain, released its new line of homes, which featured central air conditioning and larger floor plans. They turned out to be the right products at the right time. Everything sold, from dream homes with 2,700 square feet of living area priced at $500,000 to starter houses at a little more than 1,000 square feet and $200,000.

“We knew we had the right product for the market, but we never anticipated that interest rates would drop as low as they did,” says Brant. “2003 was the best year we’ve had in 10 years. Homes sold well across the board, our entire product line. Last year, homes sold out after 19-day listings. That’s absurd.”

“In the ’70s it was the Canadians who invested in real estate. In the ’80s, it was the Japanese who pushed up prices and, in the ’90s, it was the Californians,” says Bradley. “A locally driven market is a little unusual for us, but it’s fundamentally healthier.”

According to Bradley, sales have been strong throughout the market, but Coldwell has seen its biggest movement in $1-million-plus properties, a 95 percent increase from 2002. Surprisingly, most of the buyers of these homes are local residents. “Sales are good pretty much all over the Island. But we have so many desirable places that are in the $1-million area,” says Bradley. “People are just moving up.”

People just getting started have been active, too. Hawaii’s large homebuilders also had banner years. Gentry Homes sold most of its inventory of homes in 2003, earning $157 million, an increase of 41.4 percent, which bumped up the company from No. 34 on the Top 250 list to No. 41. Schuler Homes had an equally good year, reporting gross sales of $169 million, a 32 percent increase over 2002.

According to Bob Brant, Gentry’s chairman of the board, president and chief executive officer, the company’s successful 2003 was all about timing. In 2002, Gentry Homes, the pioneer developer of the Ewa Plain, released its new line of homes, which featured central air conditioning and larger floor plans. They turned out to be the right products at the right time. Everything sold, from dream homes with 2,700 square feet of living area priced at $500,000 to starter houses at a little more than 1,000 square feet and $200,000.

“We knew we had the right product for the market, but we never anticipated that interest rates would drop as low as they did,” says Brant. “2003 was the best year we’ve had in 10 years. Homes sold well across the board, our entire product line. Last year, homes sold out after 19-day listings. That’s absurd.”

Meanwhile, Back at the Ranch …

According to Victor Trevino, David S. De Luz Sr. Enterprises should experience another year of double-digit growth. The company’s real estate division, which accounted for approximately one-third of De Luz’s gross revenues in 2003, will be ramping up activity, possibly accounting for nearly half of the company’s earnings next year. In addition, the car dealerships are promising to improve on 2003’s record year. So, if De Luz is indeed an indicator species for Hawaii’s economic ecosystem, it looks as though 2004 will be a good year.

But there is yet another interesting development at De Luz, which may portend future economic and social changes on the island. In 2004, Big Island Toyota’s service departments at its Hilo and Kona locations are seeing a double-digit growth in sales. A quick check of the computers reveals that customers who previously rarely visited the company’s service center, are now stopping by two or three times a year. Breakdowns in the normally super-reliable Toyotas? Not likely. Both dealerships have a fair amount of customers who are part-time residents, visiting the island infrequently and for short periods of time. Trevino theorizes that these wealthy homeowners are now staying on the island for longer stretches of time or have made Hawaii their full-time home.

What does this mean for the island and the rest of the state?

That’s another story and another year.

Fuel to the Fire?

One of the companies conspicuously missing from this year’s Top 250 is Tesoro Hawaii Corp., which stepped on the gas in 2002 when it reported $1.68 billion in gross sales, putting them at No. 2 on last year’s list. The company declined to be listed in the 2004 Top 250, refusing to break out its 2003 Hawaii sales figures.

Out of curiosity, we did a few quick calculations to get an idea of where Tesoro Hawaii might appear on 2004’s Top 250, if company officials had participated: In 2002, Tesoro Hawaii accounted for 23.62 percent of its parent company’s $7.12 billion in gross revenues. In 2003, Texas-based Tesoro Petroleum Corp. (NYSE:TSO) collected $8.85 billion in gross revenues. Assuming that Hawaii contributed the same percentage of revenues as 2002 (we realize that it is a very big assumption), Tesoro Hawaii would have/could have reported $2.09 billion in 2003 gross sales, placing it at No. 1 on the list. The Hawaii region of the company may have earned approximately $20 million more than BancWest Corp., the list’s current top dog.

Tesoro Hawaii wasn’t the only energy company that did well last year. The energy industry has been the best performing sector of the Top 250 over the past two years. In 2003, the list’s seven energy companies reported gross sales of $565.2 million, a 15.3 percent increase over their 2002 sales. On last year’s list, the Top 250’s five energy companies had $1.94 billion in gross sales, a 41.7 percent increase over the previous year.

Is the impressive performance of the Top 250’s energy companies a compelling argument for the state Legislature’s proposed caps on gasoline prices? Not even close. Remember, a company’s sales can be very different from its profits.

“The increases in sales of Hawaii’s companies are pretty consistent with the rises in the costs of being in the oil business, both nationally and globally,” says Fereidun Fesharaki, senior fellow at the East West Center, who specializes in oil and gas markets. “Over the last several years, we have seen the cost of refining oil in this country go up. And, of course, the cost of a barrel of oil has also increased.”

According to Fesharaki, the state’s attempt to control gasoline prices would be both futile and foolhardy. He likens the attempt to dropping a leaf into a swimming pool in the hopes of affecting the water level. He says that gas prices in Hawaii and the rest of the country are extremely low compared to the rest of the world, which commonly pays twice the amount for gasoline.

“The forces that determine oil prices are huge and can’t be controlled,” says Fesharaki. “The beheading of a South Korean in Iraq will have a greater impact on the price of gasoline in Hawaii than any state regulation.”

But will rising oil and gas prices have a deleterious affect on the Islands’ booming economy? Not for a while, says Fesharaki.

“The higher prices are more of an inconvenience than anything else. Prices would have to double before people would start changing their behavior,” says Fesharaki. “Approximately 12 percent to 15 percent of our oil is used for gasoline, compared to 50 percent on the Mainland. Hawaii is comparable to Japan and Europe in that regard, and their economies are still running fine.” -DKC

Related Stories

Magazine Promo

On Newsstands Now

HB-11-14Cover

HB November 2014 Issue

Author:

David K. Choo