Hawaii’s building boom to cool next year

UH economists expect a slight decrease in activity in 2007

The local construction boom has reached its peak after seven to eight years of expansion, according to University of Hawaii economists in a forecast slated for release today.

Slackening demand for homes and rising material costs are largely responsible for the change, declares the report by Carl S. Bonham and Byron Gangnes of the University of Hawaii Economic Research Organization, along with Paul Brewbaker, Bank of Hawaii chief economist.

The team of economists says a measured decline in construction should begin next year, from $6.2 billion this year to less than $6.1 billion next year, when adjusted for inflation.

It's expected to decelerate further in following years, due mostly to a receding of the construction boom's main economic driver, residential development.

"This cycle has been largely residential," said Bonham, UHERO's executive director and an associate professor of economics. "Of course, there has also been a significant amount of nonresidential construction. We're expecting that to remain fairly stable."

The UH economists also predicted the following:

» Real contracting receipts are expected to end this year 10 percent higher than 2005, but will then recede at low single-digit rates.

» The number of construction jobs, numbering about 36,000 this year, should decline to just above 35,000 jobs in coming years.

» Median home prices on Oahu are expected to peak at $635,000 this year, and to decline next year to about $625,000.

Home prices in Hawaii have reached the upper bound in the investment cycle, after more than doubling between the late 1990s and the first half of 2006.

Off-shore demand is tapering off, while houses are sitting on the market longer and remain unaffordable to many residents.

Bonham said that housing would be in great demand if priced at about $400,000, which is what a median household in Hawaii could afford at today's interest rates.

"Prices on all the islands have risen well above what the median household could afford,"' he said. "As off-shore demand slows ... there's a reduction in buyers, and yet the cost of delivering new homes is going up."

Higher costs of steel, concrete and lumber -- rather than labor -- are driving construction costs upwards.

Bonham said it would not be surprising if more sales in the newest high-rise residential towers fell through. But the declines should be modest, and not enough to dissuade developers with projects already in the pipeline from moving forward.

Nonresidential construction, on the other hand, is expected to continue at a strong pace over the next few years, given the tight industrial market, a spate of hotel conversions and development of retail properties.

Real non-residential building permit values are expected to peak at just under $1.3 billion, and to fall below $1.2 billion next year in inflation-adjusted dollars.

Government contracts, however, have been relatively stagnant in contrast to the rising tide of privately-driven construction for the seven-year period up to 2006.

"In previous construction cycles, when there was a big increase in private sector investment in hotels and office, retail and homes, there tended to be a corresponding increase in government investment and infrastructure," said Bonham. "But it's not happening."

There is "an unparalleled dearth of public infrastructure spending," according to the report, which falls short of what is needed to support ongoing private development.

UHERO expects government construction contracts to hover between $650 to $850 million, when adjusted for inflation, up to 2008.

A potential rail transit system, or U.S. aircraft carrier based at Pearl Harbor could very well change the forecast, the economists said, but added that neither factor was factored into the latest construction outlook.