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Construction – August 3, 2020

Construction Helps Drive the Local Economy in Tourism’s Absence

Seth Gonzales of Honolulu Proper runs koa boards through a jointer in his Kailua workshop | Photo: Aaron K. Yoshino

Projects big and small, public and private, keep construction as the major economic sector with the fewest layoffs

A spacious and well-stocked warehouse in Kapolei is helping power the strongest major sector in Hawai‘i’s hobbled economy. So is a custom-cabinet maker based in Kailua and a woodworking shop in Kāne‘ohe. For them and hundreds of other small suppliers and contractors, business remains lively, despite the pandemic.

Also driving the local construction industry are big construction, architectural and engineering companies, and big local spenders like the U.S. Department of Defense, the state government and the City and County of Honolulu.

Sherry Menor-McNamara, president and CEO of Chamber of Commerce Hawaii, says construction is the only major Hawai‘i industry doing all right, based on data from the state and economist Paul Brewbaker.

“Based on the seasonally adjusted job changes from January through April, the construction industry took the smallest hit,” Menor-McNamara says. “There were roughly 700 job losses on O‘ahu and 500 on the Neighbor Islands. Compare that to other industries: accommodation lost more than 10,000 jobs on O‘ahu and 13,000 on the Neighbor Islands; food service lost 28,000 jobs on O‘ahu and 13,000 on the Neighbor Islands.”

 

“Shovel Ready” Projects

The state’s “shovel-ready” capital improvement projects total $2.7 billion and are scattered throughout 18 state departments on every island. Added to that is $5.3 billion in supplemental CIP spending approved by the Legislature in May, bringing the total to around $8 billion for the two-year state spending cycle for 2020-2021.

The City and County of Honolulu has $1.27 billion worth of CIP spending scheduled for the coming year or about to go to bid, with about 200 funded projects on the books. The largest portion – 64% or about $765 million – is going to sanitation projects, including sewer upgrades and wastewater improvements. One massive ongoing project is the city’s $267 million expansion of secondary treatment at the Honouliuli Wastewater Treatment Plant on 24 acres in ‘Ewa, being built by Nan Inc. But there is also $50 million to rehabilitate city streets and $23.6 million to widen Salt Lake Boulevard, among other projects.

The city is encouraging contractors to move quickly, “especially if it’s road paving projects,” says Mark Yonamine, director of the city’s Department of Design and Construction. “We have one coming up in Chinatown and downtown, as well as Ward Avenue, and we’re pushing the contractors to start as soon as possible.”

He says city projects are giving the economy a much-needed assist.

Hale Makana O Maili is a multifamily rental housing development being built in Mā‘ili, O‘ahu. The public-private partnership aims to provide aff ordable rentals in that Wai‘anae Coast community. | Photo: Courtesy of Moss Construction

“Definitely, construction is playing a big part right now with tourism shut down. Hopefully we’re helping out in a small way. We made sure all our projects were on schedule to go out to bid as planned, and we made sure that all our funding did not lapse at the end of the fiscal year on June 30, to see that the construction industry keeps going.”

Architect Bettina Mehnert, president and CEO of AHL, one of the state’s largest architectural firms, says the construction industry “over the last few years has been the big economic engine” for the state.

And “it appears that at least from our perspective it is not stalling,” says Mehnert, whose company’s projects include work on health care and military facilities, renovations at Farrington High School, and part of the Aloha Stadium redevelopment.

“It’s also important to look at where in the life of a project this pandemic hit,” says Mehnert. “Clients that have projects that are in construction, they’ve got to move forward. Once you’re starting construction, you’ve got to finish, so that has helped us.”

Mehnert says rail construction especially continues to be a huge boost for the economy. “We need to finish rail. Rail helps us,” she says. “Rail is important because of the TOD – the transit oriented development zones – that come with it around the stations. Many of our current projects were related to the TODs. So the architects and engineering industry right now have been beneficiaries of it.”

 

Smaller Companies Too

Let’s go back to that warehouse in Kapolei to better understand how small companies are also benefiting from the strong construction industry.

“In mid-April there was a pause on a lot of jobs, and we were expecting it to really slow down until we knew what was happening,” says Oliver Wynn-Williams, territory sales manager for Hardwoods Specialty Products, whose warehouse is stacked from floor to high-peaked roof with specialty hardwoods like African mahogany, maple, poplar, teak, walnut, sapele and rift white oak.

“It paused for two weeks, and then it came back with projects moving forward,” says Wynn-Williams, who still brings in a 40-foot container filled with hardwoods on a Matson ship every week. “The hotels are taking advantage of this time with low occupancy. I sell to the contractors and I’ve heard there’s an uptick.”

One of those contractors with a new hotel job is Mark Gavin of GavinWood LLC of Kailua, who just finalized a contract with the Waikiki Beach Marriott Resort & Spa for fine cabinetry as part of the hotel’s renovation. Gavin says that after the initial slowdown and several months of no activity, requests for estimates on larger projects “are starting to come back to life.”

Oliver Wynn-Williams at the Hardwoods Specialy Products warehouse in Kapolei. | Photo: Aaron K. Yoshino

While the future remains uncertain for many in the industry, at the moment construction is “definitely” assisting Hawai‘i’s economic recovery, Gavin says.

“It’s one of the few industries that is able to continue on a somewhat normal pace. Construction workers are often now the sole breadwinner in many families, and are carrying the family load of expenses, as well as they are able.”

Brewbaker, of TZ Economics, stresses how important an uninterrupted construction industry has been during these difficult months. “

“It’s important that we kept the engine running …. Construction is at the center of a web of economic activity that includes everyone from architects and engineers to financiers and insurance guys putting together the packages for the builders, to the importers of the building materials, and the transporters, and so on,” he says.

“That web, that ecosystem, is much larger than the 6% of the state GDP that construction – if narrowly defined – would be.”

Gov. David Ige declared industry an essential business that could operate during the pandemic and Brewbaker says early precautions have paid off. “My impression is that the industry as a whole took the pandemic seriously from the get-go and put in place workplace protocols.” That, he says, has kept the industry essentially COVID-19 free.

 

Defense Spending

Menor-McNamara points to military spending as a crucial component of the construction industry.

“That’s our No. 2 economic driver (after tourism) and there haven’t been significant cutbacks,” she says. “They are still pumping money into Hawai‘i. With our geographic position, and with bases here, there is still money flowing into Hawai‘i. For example, in 2019 local business accounted for over $1.3 billion in defense contracting, which included $857 million for construction projects.”

As of May 1, The U.S. Army alone awarded over $643 million for building renovations as well as other projects, said Menor-McNamara. “And in the pipeline for future investment funding in fiscal ’21, the National Defense Appropriations Act includes funding for the Pacific Defense Initiative. That symbolizes a strong commitment of the U.S. to the Pacific region. For Hawai‘i that is good because we’re the main Pacific command which means more money is coming here.”

All four military branches have projects underway in the state, and new projects are being added. And there’s additional work underway elsewhere in the Pacific that is helping, says AHL’s Mehnert.

“One project is the base relocation of the Marines from Okinawa to Guam,” says Mehnert. “That’s a billion-dollar project. We reached out – in some cases to our competitors – and said, ‘What do you think? Would you like to do this?’ And our joint venture (with seven firms) was awarded that project. It’s an ongoing project and it’s great for the state to be able to keep that money coming here.” The design fees alone amount to about $100 million and AHL is the managing partner.

“Once you’re starting starting construction construction you’ve got to you’ve got to finish, so that finish, so that has helped us.” —Bettina Mehnert, President and CEO, AHL

Hawai‘i Department of Transportation Director Jade Butay wrote eloquently of how state spending on DOT infrastructure projects has helped rebuild the economy.

“It may be tempting for state leaders to defer projects or raid special funds, but economists know that is not the prudent or fiscally responsible notion,” Butay wrote in an open letter to the public and the media on June 22. “HDOT projects act as an economic fiscal multiplier. The more we spend improving infrastructure and keeping people working, the more it multiplies the economic recovery. On the other hand, the less we spend, the more the recession hurts. The cumulative impact could redefine Hawai‘i’s transportation landscape, traffic flow, peak-hour congestion, as well as transportation–related environmental impacts.”

Butay wrote of the importance of government spending as an economic multiplier in a recession. “In a downturn, spending in the private sector is decreased and therefore government fiscal activity is less likely to be ‘crowding out’ other activity,” he says.

“A great example of this multiplier is the 2009 American Recovery and Reinvestment Act during the Obama administration, which estimated a multiplier of 1.5, meaning that every $1 of fiscal spending would result in a $1.50 increase in real GDP. HDOT has agreed on a similar effect, and a fiscal multiplier between 1.2 and 1.8 is embedded into the department’s evolving economic recovery efforts. As the state navigates this turbulent time, HDOT can function as an important, stable source of investment in the state’s economy.”

Butay points out that funding for HDOT projects mostly comes not from state income and excise taxes, but from a range of rents, dockage, fuel taxes and other fees, as well as federal aid and grants.

 

Hotels Move Ahead

Mehnert says some hotels find it easier now to schedule renovation projects. “Some hotel properties are taking advantage of this downtime by implementing upgrades, addressing deferred maintenance and minor renovation work,” she says. “Those are the ‘feel-good stories’ in this pandemic because local talent is available to handle that work.

“We have the woodworkers. We have the engineers. We have the specialty craftsmen. We have the design talent. We have it here.”

Seth Gonzales, who runs his own small company, Honolulu Proper, makes fine woodworking products and cabinetry, much of it for retailers selling to the tourist trade. He, too, sees the building trades assisting the economic recovery.

But, he warns: “What must be understood about construction/craft is that it exists on its own timeline. Planning, permitting, financing and construction are things that take months if not years to accomplish. Any sizable project that is working today is keyed to a different, pre-COVID time. Today’s projects were funded pre-COVID.”

Gonzales’ company landed two new projects in May and June after having other projects put on hold in April. “For those that have only been mildly affected by the COVID economy, low interest rates are encouraging homeowners to invest in home improvement projects,” he says.

“Construction has continued to give people jobs that allow them to maintain their livelihoods and will serve as an economic foundation for the recovery.” —Aaron Yamasaki, Division Manager Hawai‘i Operations, Swinerton Builders

“This pocket of local consumer confidence has granted us a large exterior millwork project, and an interior closet/cabinetry project. The mainstay of our work in the spring and summer months is producing woodworking products and fixtures for local retailers. As it stands, our local retail partners are anticipating about four to six weeks of potential summer sales this year. To that end, product orders that were tabled in March and April are now being reinstated, though smaller and with longer payment terms.”

Mark Gavin of GavinWood sees a similar pattern. While there was a slowdown or halt in some commercial and hotel projects earlier in the year, projects are showing life again, he says, and need to be completed. But it’s not yet business as usual.

“Current new work is smaller orders, most of which are for projects currently in process, and mostly residential,” says Gavin. “We are the custom cabinetmakers for quite a few general contractors, and some of these projects are winding down, and they are adding a few more items for us, but nothing substantial.”

However, there has been a silver lining, Gavin says. “We are finishing up the larger contracts and nothing that was in process was canceled. We are considered an essential construction industry company, and we have been working normal hours during this COVID time, so timetable for ongoing projects has not been affected, other than a couple of hotel-related jobs.”

 

Companies Hiring

Aaron Yamasaki, division manager of Hawai‘i operations for Swinerton Builders, a national company with a large Hawai‘i presence, says Swinerton has been hiring.

“We are fortunate the majority of our projects and work are continuing operations,” Yamasaki writes in an email to Hawaii Business Magazine. “We’ve actually been hiring on active job sites to support the additional protocols for (COVID) prevention.

“Construction has continued to give people jobs that allow them to maintain their livelihoods and will serve as an economic foundation for the recovery,” Yamasaki writes. “In a public statement made by CEO Eric Foster earlier this year, Swinerton is renewing its focus on health care, affordable housing and education in all geographies in which it operates, including Hawai‘i.”

In Hawai‘i, the company also has several hotel projects, including renovations at the Turtle Bay Resort, Kāʻanapali Beach Hotel and the Westin Maui Resort and Spa. And with few or no guests on the properties, work has been accelerated. Swinerton is also handling renovations at the Queen Emma Building in downtown Honolulu and Solomon Elementary School at Schofield Barracks.

A team from Swinerton Builders poses for this picture while renovating the 12-story Queen Emma Building (nicknamed “the pimple building”) across from the Cathedral of St. Andrew. The renovation aims to provide affordable rental units on the edge of downtown Honolulu. | Photo courtesy of Swinerton Builders

Menor-McNamara says laid-off workers in other fields should consider learning new skills since construction companies are hiring.

“According to the Hawaii Construction Alliance and the Pacific Resource Partnership, it’s the opportune time for workers who are displaced to pivot and gain new skill sets in the construction industry. One thing about it is they have apprenticeship programs. There’s a pipeline that leads them to good-paying jobs.”

Some of those jobs will be at Mana‘olana Place on Kapi‘olani Boulevard, across from the Hawai‘i Convention Center. The AHL-designed project there includes the 125-suite Mandarin Oriental hotel, plus 109 condominium residences, shops, restaurants and entertainment venues. The $362 million project will provide from 600 to 900 full-time construction jobs and another 250 permanent jobs after completion, says AHL’s Mehnert.

“It will have a big positive impact on the state. Even in times like these there is a market for this product.”

 

Trickle Down

Such big projects create a trickle-down effect for smaller companies, especially in a recession. Seth Gonzales of Honolulu Proper explains it well.

“Proper is a small fine-woodworking studio so we cannot say that we would directly benefit from county or state construction projects,” he says. “I would note that in Hawai‘i we have seen, time and again, that large construction projects are a rising tide that raises all ships. Large woodworking projects directly benefit the handful of large millwork and cabinet shops in Hawai‘i, which means that the projects that those shops would typically be working trickle down to Hawai‘i’s more prevalent medium and small shops.

“I would offer, as an example, the Ala Moana/Park Lane project from a few years ago. Not every woodshop on O‘ahu worked directly for Park Lane, but every shop benefited from the excess of high-end work that filtered down through the trade economy on O‘ahu.”

Seth Gonzales of Honolulu Proper fits a koa wood cask with its custom oak cradle for local rum distiller KōHana Rum. Next the cask wood will be hydrated with water then checked for leaks and finally filled with rum at the distillery. | Photo: Aaron K. Yoshino

Gonzales’ optimism is tempered by an ongoing sense of concern. “There is a certain amount of confidence in construction continuing to move forward, but it’s isolated to a few companies that are fairly successful,” he says. “It’s a common feeling that if you drill down everyone is deeply concerned about financing for projects. I think everyone has had to extend accommodations to clients.

“Drilling down, it has the feeling of being a slightly hollow economy. How long can it sustain itself when federal funding is withdrawn, which was propping up the labor economy? The projects moving forward in the fall would be the ones in planning and funding now. And it’s hard to see those going forward. Though projects are moving right now, I’d be very concerned about how things are going to look in fall and winter. Capturing four to six weeks of decent sales (over the summer) and having to survive until holiday sales – that’s a bleak future for many kama‘āina retailers.”

A Condominium Can Last Hundreds of Years, But No...

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