Oahu homes predicted to hit $700K

Bank economist Paul Brewbaker expects housing prices will peak this year, then stay where they are

Although Hawaii is coming off another record-setting year in real estate that has left many wondering how much momentum is left in the market, local residential and commercial property experts say the ride will continue into 2006, albeit at a slower pace.

Paul Brewbaker, Bank of Hawaii's chief economist, predicts some slowing in single-family home resales, particularly in the higher end of the market in highly sought-after neighborhoods such as Hawaii Kai, Kahala and Kailua.

But other neighborhoods like Makaha, Nanakuli and Pearl City still have plenty of price appreciation left before Oahu hits an islandwide $700,000 median single-family home price, which Brewbaker says is where the real estate cycle will peak sometime this year.

"There's an underlying pattern of price appreciation shifting from all neighborhoods to fewer by 2007," Brewbaker said. Last year was the first year since the 1990s that Hawaii home buyers saw a major decline in affordability, he said.

Brewbaker made these remarks yesterday during a joint real estate meeting between the Hawaii chapters of the Institute for Real Estate Management, the Building Owners and Managers Association and the Certified Commercial Investment Member Institute. He also predicts the prime interest rate will rise to about 7.5 percent by the year's end, although not to levels likely to cause a significant slowdown in economic activity.

Buyers who waited to make home purchases will find even fewer affordable properties in 2006, Brewbaker said. For stragglers who are getting into the market in 2006, buying a home will be all about managing expectations.

"Have buyers missed the train? They have if they wanted to live in Kailua," he said. "But there are still positive expected returns in some neighborhoods in West Oahu, the Hilo side of the Big Island and outlying areas of Maui."

Although in many neighborhoods prices will move sideways in 2006, Brewbaker said that barring any catastrophic event, owners won't see a drop in their investment.

"It's better to get on the train now, because it isn't coming back," he said.

Brewbaker said he doesn't believe the market will see a significant drop after prices peak. Instead, prices more likely will hold steady for a few years until salaries and wages catch up, spurring another upward cycle, he said.

As affordability declines, sales will probably soften a bit, said Herb Conley, managing director for Coldwell Banker Pacific Properties.

The total number of single-family homes sold in 2006 will likely be down slightly from 2005, he said.

"But even if they did, it would be the third-best year ever in the history of the planet," Conley said. "I don't think we'll have this huge boom and boost. What we're seeing is a normal cycle."

As more buyers are pushed out of the single-family home market, record condominium resale activity will continue all around Oahu, Conley said.

While the residential market is still outpacing the commercial real estate sector because of investor preference, the 2006 outlook for Hawaii's hospitality, office, retail and industrial markets is largely positive.

Patrick Deming, the managing director for Secured Capital Corp., forecasts that the rate of return on real estate investments in the state will hit the low 6 percent range in 2006.

A flurry of new investment in Oahu, especially in the resort areas, will result in improvements as better-capitalized owners can reinvest in the market, Deming said.

The strength of the economy and job creation also has fueled the office market, said Matt Bittick, vice president of PM Realty Group.

"The office market is turning the corner and coming out of what seems to be an eternity in the doldrums," Bittick said. Tight parking is just one of the signs that the market has recovered.

He predicts a 9 percent increase in Honolulu's office occupancy level in 2006 along with increases in rents, especially for larger tenants who need more than 10,000 square feet of space.

"It's going to continue at a steady-as-she-goes pace," he said.

Oahu's retail market is still hot, said Wendell Brooks, senior vice president of PM Realty Group, who forecasts that occupancy will rise another 4 percent by the year's end.

"We've had another wave of growth with increased sales in all sectors across the retail board," Brooks said. Retail vacancy rates will continue dropping and rents will continue rising, he said.

Oahu's proximity to sought-after Asian markets as well as its success as a top market for General Growth's Ala Moana Center and the Cheesecake Factory at Royal Hawaiian Shopping Center have spurred interest from new retailers nationwide.

"There are $3 billion worth of proposed retail projects statewide," Brooks said. Momentum is likely to continue as long as the state's tight labor market does not interfere with the expansion plans of retailers.