IRAQ. SARS. NO MATTER, CONSTRUCTION GOES

The numbers

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By Lyn Danninger
ldanninger@starbulletin.com

Tourism is slowing. Tech is struggling. It's construction that is propping up Hawaii's economy.

Despite the weaknesses in traditionally important areas of the state's economy, such as tourism and transportation, a recent University of Hawaii report found that the solid performance of other sectors, particularly the building industry, helped carry Hawaii's overall economy, creating both new jobs and increased income.

The news that a prolonged downturn in tourism does not automatically spell doom for the state and prevent the economy as a whole from doing relatively well, is counterintuitive for many. As conventional wisdom would have it, any slump in tourism could spell economic ruin. Such was the case during the first Gulf War when visitors stayed away and left the state economy bobbing for years in the economic doldrums.

DEAN SENSUI / DSENSUI@STARBULLETIN.COM Managing director of the Sand Island treatment plant project Ralph Raymond overlooks part of the huge construction project taking place at the sewage treatment facility.

"I think the future here looks pretty good right now," said Gerry Majkut, president of Dick Pacific Construction Co. Ltd. "2002 was a pretty good year for construction in Hawaii. We think 2003 will also be good."

The recent economic forecast by the UH Economic Research Organization assumes no major changes in interest rates in the next couple of years, although small movement could be seen by the end of this year.

"We are not assuming any kind of a significant move in rates over next six to 12 months and even then we are still talking about relatively small movements," UH economics professor Carl Bonham said. "We will see long-term rates go up next year but not enough to cause serious damage to our prospects. ... But what happens with the Bush tax cut will matter a lot as will the growing federal deficit which will play a role in driving long rates up and the improved economy."

Tax records show construction activity subject to the state's general excise tax increased 8.5 percent in the fourth quarter of 2002 from a year earlier, and continues to look strong for this year. Activity has increased 16.3 percent for the first five months of the state's fiscal year, with about $1.91 billion collected, according to the State Department of Taxation Office of Tax Research and Planning. The construction tax base for the entire 2002 fiscal year was about $4.01 billion, according to the department.

Mark Robison, president of Robison Construction Inc., has seen his business expand over the past couple of years.

The company has about $250 million in backlogged contracts in Hawaii, Robison said. RCI does site work and builds infrastructure for military, state and county projects, employing about 200 workers. The company has three projects at Ford Island totaling about $50 million as well as a $150 million project to expand the existing Sand Island Wastewater Treatment Plant and bring it up to EPA standards.

State capital improvement projects spending went up for the fourth quarter of 2001 by 9.1 percent over the fourth quarter of 2001, according to the state Department of Business, Economic Development and Tourism figures.

Robison says he is cautiously optimistic about the future over the next 18 to 24 months.

"We're thinking the economy will continue at about the same for construction as it's been over the last one and a half to two years," he said.

RCI has been doing business in Hawaii for about seven years. Its first two years were spent doing environmental clean-up projects before branching out into other types of construction projects, Robison said.

Diversification has been key to the company's success, Robison said.

"It looks like we made a pretty good decision at this point in terms of our projects," he said.

Maryl Development has undertaken a number of residential and resort projects along the Kona-Kohala coast of the Big Island as well as commercial projects statewide.

The company has done well targeting the baby-boom demographic looking for both primary and secondary residences, President Mark Richards said. Currently the company employs around 200 people.

The underlying factor bringing increased business is not only attractive interest rates, but demand for a particular lifestyle and the demographic bubble of people reaching middle age, Richards said.

"It's been the baby boomers mostly from the West Coast coming to the Big Island to invest. There are 10,000 people a day on the mainland who turn 50. It doesn't take a whole heck of a lot of them to make a huge impact. So we are chasing that demographic. My gut feel is that this will continue to ramp up in a gentle slope as more people get into to this category," he said.

The value of building permits for homes was up 44.9 percent statewide for the fourth quarter of 2002 while the volume of building permits for single-family homes jumped 56 percent. The number of permits for multi-family buildings increased 46.9 percent for the fourth quarter of 2002. Total private building permit numbers for the state as a whole increased by 32.4 percent for the fourth quarter of 2002 and for the full 2002 year were up 11.8 percent over 2001.

For Bob Wilkinson, president and CEO of Grace Pacific Corp., an election last year meant lots of road repair and maintenance jobs for the company.

"That's normal during election time, although the jobs have kind of cooled down now," he said.

Wilkinson expects the road business to pick up later again this year. Just how much depends on state and city budgets, he said.

Contractors say they expect some slowdown in state as well as city and county construction jobs because of tight budgets, although none are sure yet how much less work there may be. UH economist Bonham said he had heard the state was planning on some reductions.

"At the gut level you assume it's going to happen," he said.

But Bonham said he believes that unless a business relies entirely on state or city contracts, any drop will be offset by military and commercial contracts.

Wilkinson has already branched into other types of businesses. The company purchased Kauai-based Niu Construction last year and has acquired pre-cast and seal coating businesses as well.

"Our strategy is to diversify, which we are in the process of doing so we can take some of the ups and downs out of government contracting," he said.

For Isemoto Contracting Co. Ltd., based on the Big Island, a major growth area has been site development. The company began increasing its work force in 2000. Prior to that, growth in employees had been status quo, staying at about 80 employees for 10 years, said company president Leslie Isemoto.

But by 2001, the number doubled. Isemoto currently employs about 240 people, he said.

"Infrastructure for large luxury subdivisions is where we first saw growth in about 2000. Now we've been getting a lot of calls recently to come up with proposals for turnkey warehouses," Isemoto said. "I think interest rates are so low that everyone is thinking about it. The stock market hasn't been helping so they're looking elsewhere."

Given the interest, Isemoto said he is currently mulling the idea of building such a facility himself.

"We are even looking at putting up a facility and leasing it out," he said.

For the state's largest construction company, Dick Pacific Construction, 2002 was a very good year, Majkut said.

Like others, the company has diversified and works in the government, military and private markets.

"Between all three it allows us to participate in all the major markets here," Majkut said. Currently the company has about 600 employees.

Increased work in the military sector, plus the completion of the Marriott timeshare project at Ko Olina helped the company boost revenues last year, Majkut said.

Still, Majkut said he is already evaluating the prospects for 2004 both locally and nationally.

"We are keeping a close watch on the new administration to see what types of projects they are looking for. There are also so many variables in the whole U.S. economy. That's the key driver. A strong overall upturn in the economy is what we are looking for," he said.

The strength of the construction industry has also meant those it employs have had money to spend, giving the state's economy a further boost.

Construction jobs grew 4.6 percent in the final quarter of 2002 from the fourth quarter of 2001 and the growth continues into this year. As of February 2003, about 26,550 people hold jobs in the construction industry, according to the state Department of Labor and Industrial Relations.

RCI's Robison said it's not hard to figure out the impact his employees have on the local economy

"The average age of our employees is 34.5 years. Their take-home wage is about $56,000, so these are not minimum-wage people," he said. "The average employee is also married and their children are young. These are people who are taking families to the movies, buying a car, shopping for groceries, buying a house or re-financing and looking to move up."

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The industry No matter how you measure it, construction in Hawaii is a leading economic sector. Construction tax base Year Billions Annual change 2002 $4.27 13.5% 2001 $3.77 4.2% 2000 $3.61 20.8% 1999 $3.00 -0.8% 1998 $3.02 2.4% 1997 $2.94 -10.4% 1996 $3.23 4.8% 1995 $3.13 -5.7% 1994 $3.32 -12.7% 1993 $3.80 -5.2% Single-family units authorized Year Number Annual change 2002 4,535 15.5% 2001 3,925 -4.5% 2000 4,109 23.2% 1999 3,336 12.9% 1998 2,954 9.3% 1997 2,702 -3.7% 1996 2,806 -27.9% 1995 3,892 -14.9% 1994 4,576 -3.7% 1993 4,750 3.8%