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University of Hawai‘i Economic Research Organization: Hawaii Construction Begins to Stabilize

Photo courtesy of UHERO

Hawaii’s construction industry continues to seek a bottom to what has been a bruising downturn. Recent months have
brought some encouraging news, with permitting numbers beginning to stabilize and employment losses tapering off. The home resale market appears healthier, although this can be explained in part by the now-expired Federal tax credits.

At the same time, non-residential permitting remains very weak and focused on just a small number of large projects. Until private demand picks up, the industry will find its most promising support in public sector projects, which are expected to ramp up further in coming months.

• Like much of the country, Hawaii has seen a rally in home resales, with large double-digit gains in all four counties for both condos and single-family homes. This reflects in part improved affordability associated with lower housing prices and historically low mortgage interest rates. However, the now-expired Federal homebuyer tax credits almost certainly played an important role.

• Increased sales have not fully arrested a slow downward trend in home prices, but the decline has tapered off; on Oahu, they have begun to edge up. With a limited supply of housing in the Honolulu market, conditions should support
gradual appreciation over the next several years. We expect Honolulu median single-family prices to rise by close to
4% this year and next, with strengthening thereafter. UHERO does not prepare numerical forecasts for the Neighbor
Island housing resale market.

• The outlook for residential investment remains difficult, but we have begun to see a slight recovery in permitting
activity on the Big Island and Oahu. Prospects for residential building are generally less satisfactory on the Neighbor
Islands than on Oahu because of continuing weakness, pockets of overbuilding, and the lack of offshore demand.
Total real (inflation-adjusted) statewide residential building permits are expected to post a 4.3% gain for the year as a
whole, and they will rise more than 18% in 2011. In 2012 permits will still remain 39% below their 2005 peak.

• Private nonresidential permits and government contracts appear to have leveled off. However, activity has been concentrated in a relatively small number of large projects, the overwhelming majority of which are on Oahu. Demand for new private nonresidential projects is being suppressed by high vacancy rates among office, industrial, and specialty/resort retail. Development by big box retailers appears to be the most dependable source of growth for the next few years. Permits for the year as a whole will be roughly unchanged from 2009 levels. Non-residential permits will remain 33% below peak in 2014.

• Government contracts awarded surged 20% in the first half of the year, compared with the same period in 2009, with
the awarding of a number of large energy and highway contracts and several University of Hawaii projects across
the state. We expect the pace of growth to back off next year, but government infrastructure projects will maintain a
level roughly 50% higher than during the 2005-2009 period. As in past reports, we emphasize that our government
construction forecasts do not incorporate estimates of the impact of Oahu rail transit.

• The statewide construction job count has stabilized but will show a 3.6% decline for this year as a whole; it will expand by just under 2% in 2011. Real construction labor income will decline 2.6% this year, turning to 3.2% growth in 2011. More significant job and income growth will not resume until the next industry upswing is well underway in 2013. The real General Excise and Use contracting tax base will decline by 16% this year and will stabilize in 2011.

• In Hawaii as in the nation as a whole, there remains a high level of foreclosure activity and a potentially vast overhang
of troubled mortgages that could ultimately wind up in foreclosure. How this shadow inventory impacts housing markets (and construction) will depend on the pace of economic improvement but also on how rapidly financial institutions act to move troubled properties off their books. Other vulnerabilities include the reliance on a small number of large public projects and external risks associated with weakening U.S. and global recoveries.

Click on image to enlarge

The UHERO Forecast Project is a community-sponsored research program of the University of Hawai‘i at Mānoa. The Forecast Project provides the Hawai‘i community with analysis on economic, demographic, and business trends in the State and the Asia-Pacific region. All sponsors receive the full schedule of UHERO reports, as well as other benefits that vary with the level of financial commitment. For sponsorship information or more information on this forecast, see http://www.uhero.hawaii.edu

This is the UHERO FORECAST PROJECT, PUBLIC SUMMARY released SEPTEMBER 24, 2010 entitled Annual Hawai’i Construction Forecast: Construction Begins To Stabilize This is presented by ©2010 University of Hawai‘i Economic Research Organization. All rights reserved. Submitted by CARL S. BONHAM, PH.D. Executive Director of UHERO.

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