And Welcome to Boomtown (For Now)
You've read the news: the economy is in
a precarious position, housing's a mess, the dollar is losing value, fuel
costs are up, and airline travel is an expensive horror. With conditions
like that, you might think that the island economy of Kauai could be going
down the tubes.
Think again, says First Hawaiian Bank
and Hawaii Pacific University economist Leroy Laney. Laney says that Kauai's
economy is in the best economic shape in Hawaii. Though the state economy is
slowing, it is overall in good shape and expected to remain that way.
In a recent Pacific Business News
column, Laney cites Kauai's current building boom, which is in contrast to a
slowdown in permits on the other islands, and tourism growth, which also
exceeds that of the other islands, as factors that have improved the
island's economy in 2007. Job growth is up 3 percent this year, the highest
of the islands, with a 10 percent increase in construction jobs leading the
way. Even with real estate sales in a slump, the hub of construction and the
tourism industry are heating up the island's economy, and the trend is
expected to continue into next year. This is an encouraging column, and to
read it in its entirety,
click here.
Of course, the question that comes to
mind is, can it continue? Will the tourists flocking to Kauai actually
buy all the new homes and condos being built around the Kiahuna Golf
Course, the ocean view condos at Koloa Landing, the land and homes in the
1,000-acre luxury Kukuiula development, or the many phases of high-end homes
and condos at Kauai Lagoons in Lihue? Undoubtedly some of them will,
particularly the luxury-class buyers who are increasingly drawn to Kauai.
Nevertheless, real estate everywhere has four cycles: recession, recovery,
expansion, and oversupply. (You might think that builders would learn from
the cycle and avoid the oversupply phase, but they can't. No one knows how
long a cycle will last until it has already begun to change, and it takes
time to develop a project, get it approved, build it, and start to sell it.)
Kauai's large number of timeshares,
the most in all the islands, helps keep the tourism market stable. Timeshare
owners have already paid for their stay, and are extremely likely to use
their time or give it to friends or relatives to use. Some timeshare owners
eventually decide they want to spend more time on the island and buy
property here as well.
But no amount of timeshares can make
Kauai immune to the real estate cycle, and the enormous amount of new
construction going on at once, combined with a build-up of existing
inventory, is bound to put pressure on prices. The spread of the sub prime
lending problem also indirectly affects Kauai. Although few sub prime loans
were made in this vacation home market, many property owners here own
several properties and are being squeezed by an interest in mortgage rates
as they refinance their adjustable-rate loans. Some have gotten in trouble,
and we have a few short sales on the island, which are precursors to a
foreclosure. Because of these factors, prices have come down this year
in existing homes and condos in most areas, and even a few developers have
lowered some prices. In the long run, though, heavy restrictions on
development tend to mitigate the short-term oversupply problems.
Restrictions also keep prices higher than they would otherwise be.
The current downturn in real estate
prices is an opportunity for some buyers. Others are waiting to see what the
market will do. The waiting causes prices to soften further. However, demand
is such that when prices reach a certain level -- $710,000 for a new
3-bedroom condo, say, or $385,000 for a Princeville lot -- buyers do come in
and put their money down. Just as builders have trouble timing the market,
sellers don't know what the magic selling price is, and like builders, they
don't want to leave money on the table. So it takes time, but the market,
like water, eventually finds its level and moves on. For more specifics on
real estate, please see the last section of this newsletter.
Ferry or No Ferry?
That is the question that has gotten
island residents riled up more than any other issue in the past several
years. Some 300 angry protestors of the $300 million Hawaii Superferry
gathered at the harbor for the ferry's maiden voyage to the island on August
26, and when some of them jumped into the water and swam in the path of the
oncoming vessel, the ferry reversed course, returning hours later after the
Coast Guard had cleared the waters. The next evening, the performance was
repeated, with swimmers, surfers, and canoe paddlers forming a blockade that
again turned the Superferry back, despite some of the protestors being
removed from the water and arrested. They were given a hero's welcome by the
anti-ferry crowd.
Ferry protestors cite concerns about
the fast-moving vessel's potential of hitting migrating whales, and
introducing invasive species onto the island. But the main concern seems to
be an additional 282 vehicles driving off the ramp and onto Kauai's already
clogged highway.
The rallying cry of the protestors is
that an environmental assessment was not done prior to the ferry's launch. A
recent Hawaii Supreme Court ruling agreed that in fact, the state should
have required one. But the court did not stop the ferry from operating while
conducting the assessment, which was not previously required. The ferry's
owners say that doing an assessment takes months, and the ferry will be
forced out of business if it can't operate for that long. Court rulings in
the near future will determine whether the vessel can continue to run. In
the meantime, governor Linda Lingle, who supports the ferry, visited Kauai
to meet with residents to discuss it, and was booed and heckled onstage. The
unruly actions of some of the protestors has created resentment in Oahu,
where there is widespread support for the ferry, and among ferry supporters
on Kauai.
The future will determine whether the
ferry is able to run, but the heated debate over it has made a couple of
things clear. One is that many people here are fed up with development, and
especially with increased traffic. Another is that if Hawaii wants to
improve its rating as a good place to do business, where it now ranks near
the bottom in most surveys, it needs to provide clear and consistent rules
for businesses to follow. Otherwise businesses will not be attracted to the
state. Without a diversified economy, the inevitable booms and busts of the
real estate cycle are much harder to weather.
Possible Agricultural Subdivision
Moratorium
Another manifestation of
anti-development sentiment is mayor Brian Baptiste's new proposed moratorium
on new agricultural subdivisions. Before the early 1980's, much of Kauai
consisted of huge tracts of former agricultural lands. Though no longer used
by Big Sugar or Big Pineapple, the tracts were too large for individual
sale, and people who wanted to buy more space than an ordinary lot were
unable to do so. As a result, agricultural subdivisions, and on them, CPR's
(condominium property regimes) were created to break these parcels up into
units that could be sold and developed. Although these lands have kept the
agricultural designation, the vast majority are homes on acreage, not farms.
Now, on Kauai and throughout the state, there is concern that the islands
are losing their rural character and agricultural base. That is undoubtedly
true, and it has been true for the past 20 years. But can the trend be
changed back, when Big Sugar and Big Pineapple are gone for good, and few
people want to engage in running a small farm that is, at best, barely
profitable? The idea of the proposed moratorium is to stop such developments
"until a long-term solution can be found." A new state law requires all the
islands to identify and define important agricultural lands, presumably so
that their development can be regulated. The13 current agricultural
subdivisions that have received preliminary approval in Kauai will not be
affected by the proposed moratorium.
No word on when the county will vote on
the moratorium, or for that matter, when it will vote on the controversial
bill to prevent new vacation rentals outside the county's visitor designated
area. That bill has been deferred several times already. Living in Kauai,
where it's easy to keep abreast of the major issues, you can really see why
government regulation so often misses the mark. It takes a long time for
government to act, especially when the matter is controversial, as all
important matters are. Usually there are studies involved, then debate,
often further studies, then finally a vote. By the time the government takes
action, the situation it is addressing has already occurred. Then the new
legislation sets in stone rules that may not work as things change in some
different way in the future. Even some people within the government
recognize that it needs to be more flexible ... how to do that is the
problem. Don't count on any quick solutions.
Preserving Beach Access
One new law that passed without much
controversy recently was a resolution to stop beachfront property owners
from planting vegetation below the shoreline, making public access
difficult. The homeowners say that without the plantings, erosion will occur
on their property, but the council took a stand for public beach access.
Volunteers and environmentalists will be allowed to remove plants along
public beach access, and the county will pay for a consultant to monitor the
shoreline.
Big Box Stalemate
Kauai's ban on "big box" stores,
directed at a proposed expansion by Wal-Mart, is less certain of
success. In May the county voted to prohibit the construction of any retail
or wholesale establishment larger than 75,000 square feet. Existing Costco,
Wal-Mart, and Kmart stores are already over 100,000 square feet, but some
people feel no more should be built. The only planned expansion is at
Wal-Mart, which wants to become Hawaii's first Super Wal-Mart by
adding grocery aisles to its mix. The store would expand from 119,000 to up
to 185,000 square feet and add competition to the grocery market. The big
box ban seemed to preclude that, but the store is arguing in court that the
county approved its expansion before the ban. Once again, arguments about
rescinded permits and consumer choice vs.. rural character are being bandied
about. Sounds a lot like another island super debate, but affordable
groceries may appeal to a larger constituency than a ferry ride, which far
exceeds the cost of flying.
Coco Palms Remains an Eyesore
Those decaying brown buildings only
partially hidden by trees along the highway in Kapaa will not, after all, be
restored to their former glory of the Elvis era. At least not by Coco Palm
Ventures, the local developers who had planned to spend $220 million
rebuilding the resort into 196 condos, 48 hotel rooms, two restaurants, and
a spa. What happened? One problem was that the county denied a permit for
the spa, a crucial amenity for attracting affluent buyers and visitors to
the resort. Many nostalgic visitors, some of whom remember the 1961 Elvis
movie "Blue Hawaii," which was filmed at the resort, and others who stayed
there after getting married at Fern Grotto, will be disappointed.
Twenty-five people had already put down deposits to purchase a condo.
They'll get their money back, but it may be tough to find another developer
willing to take on the daunting task of restoring or rebuilding the resort.
The location, right along busy Kuhio Highway, is not a tranquil spot,
though the 54-acre site does provide some room farther inland where
buildings could be somewhat insulated from traffic noise. The beach and the
restaurant sites are on the other side of the highway, though the developer
solved that problem by getting permission to build a pedestrian tunnel
walkway across the road. Despite its many challenges, the redevelopment of
Coco Palms generated a lot of interest as it started to move along. If
anyone out there knows a developer -- or a public interest group -- who
might want to take on this project, please contact me. This is the last
resort on Kauai still not restored after the 1992 hurricane, and the whole
island would be grateful to see it fixed up. The property will be auctioned
off later this year.
A Five-Star Hotel for Princeville
One resort that will definitely be
getting a major facelift is the north shore's Princeville Resort.
The hotel renovation will be the
first significant improvement undertaken by Princeville's new owners, who
have spoken from the beginning about making Princeville into a true world
class resort. Formerly a Sheraton and now managed by Starwood,
the 20-year-old hotel will undergo a $60 million operation to be turned into
Hawaii's first St. Regis, a five star hotel. The renovations are expected to
start in mid-March 2008 and continue to January 2009. The spa will be
relocated to the hotel from its present location at the Prince clubhouse.
The fitness center at the Prince clubhouse will be moved to the Makai
Clubhouse, which has been mostly unused since the 1992 hurricane, and will
itself undergo a $10 million renovation. Developer Jeff Stone's Princeville
Associates, along with partners Morgan Stanley and Cornerstone Real Estate
Advisors, who together purchased all of Princeville in 2005, will pay for
the St. Regis renovation. An upscale restaurant may also be in the picture.
If they can afford it, City of Los
Angeles retirees may want to come visit the new hotel. They own it.
Ownership of the hotel was spun off to the Los Angeles County Employees
Retirement Association on the same day that Stone's group bought all of
Princeville.
Change coming to Safeway Shopping
Center
Kauai Village Shopping Center, the
green buildings along the highway in Kapaa whose most prominent tenant is
Safeway, is also being renovated and will be filled with 10 to 15 new
businesses in its vacant spaces when the work is completed sometime in the
next year. The shopping center's three-story clock tower and courtyard with
a bridge and landscaped ponds will remain, as will the familiar Wyland whale
murals on the wall facing the highway and the clock tower. The owners want
to add shops that will be more attractive to visitors. With the new Waipouli
resort right across the street and many new oceanfront condo-tels in the
vicinity, Kapaa is much more of a visitor destination than it used to be. A
breakfast and lunch restaurant such as Denny's or IHOP may be coming in, as
well as an upscale Pacific cuisine restaurant.
Sugar Ethanol Comes to Hawaii
Despite government incentives that have
lured Midwest corn farmers into using millions of acres to produce ethanol,
corn, it turns out, is an inefficient medium for creating the alternative
fuel. Sugar works much better. As the former king of sugar, Hawaii is a
natural place for making it, and the state's first ethanol plant will soon
be breaking ground right here in Kauai. Gay & Robinson, the island's last
working sugar producer, will spend $80 million to build the
sugar-cane-fueled plant, which will produce 12 million gallons of the
alcohol-based fuel a year. That's enough to satisfy 30 percent of the
state's demand under a new law that requires most fuel to be at least 10
percent ethanol. The new facility will preserve the company's sugar
operation and the 230 jobs that go along with it. The company hopes to
receive state tax credits for its construction, and if it's successful, may
add hydro power and solar energy production in future phases.
Real Estate: A Tale of Two Markets
It is the best of times (for a
fortunate few.)
It is the worst of times (the worst in
several years, for many -- though things could be a whole lot worse than
this!)
Welcome to Kauai's bifurcated real
estate market! The high end of the market -- properties listed north of $2
or $3 million -- is thriving, with a few select properties selling for
record prices and a massive amount of luxury development being built to
accommodate more of these buyers, especially in the Poipu area. But for the
bulk of properties in the $400,000 to $2 million range, sales have slowed
dramatically, and prices have dropped. It's a buyer's market, more so than
last year, when prices were flat. Still, many buyers are sitting on the
sidelines.
September statistics show an overall
island decrease in the number of sales, which were down 13% for residential,
30% for land, and 57% for condos compared with September of 2006. Even in
the south shore area of Koloa, which includes the resort town of Poipu,
residential sales were down 46% and land sales down 83%. Condo sales
remained flat.
On the north shore, the number of
residential sales was actually up 38%, and condo sales up 67% over last
September's. However, you have to remember that last year was the year of
the north shore's disastrous flood and subsequent dam breach, which killed 7
people and generated worldwide publicity of the sort that no one wants, and
sales reflected that. Many of the north shore condo sales this year have
been at the new Kaiulani project, though this month a few other condos also
sold. If the price is right, buyers will buy into the desirable north shore
neighborhoods.
The north shore has seen three sales
above the $8 million mark so far this year, and another $8.7 million
property is currently in escrow. The sales included an oceanfront lot on
Weke Road in Hanalei for $6.75 million, an estate at Kilauea's gated
Seacliff community for $6 million, and a home in ocean bluff-front Anini
Vista for $9 million.
None of those sales occurred in
September, but the median price of a north shore home at $1,250,000 is
nearly 12% above last September's median of $1,118,250. Home sales prices
may be up over last year's, but listing prices continue to come down, as
they need to do to sell in this market now flooded with inventory. As for
north shore condos, the median price stands at $654,000, more than 12% below
last year's of $746,683, even with all the high-end Kaiulani sales.
In Koloa, the median residential price
hit $705,000, 6% below last September's $749,000, offset by the median condo
price, which gained nearly 6%, moving from $702,500 from last year's
$665,000. Just one vacant lot sold, for $350,000, compared to 6 last year
for a median of $1,100,000. There is very little developable land left in
Poipu, which is definitely not where the $350,000 sale occurred.
Perhaps that is why the most
mind-boggling potential sale lies in Kalaheo, a hillside town with ocean
vistas a few miles north and west of Poipu, where a 280-acre property listed
for $20 million went into escrow in September. What's even more surprising
about this sale-in-progress is that only 8 homes are planned for the
entire parcel. They would have to be mighty fine estate homes for the
developer to make money, if that is the goal. Stay tuned to future issues to
see if the sale goes through.
Back down to earth ... For the island
as a whole, the median home price for September was $675,000, compared with
last September's $730,000. Median condo price was about the same, $590,000
compared with last year's $595,000. A lot of newly converted condo-tels have
hit the market this year and last year, which could depress condo prices if
that segment of the market picks up. So far it's pretty slow, which is what
you would expect with so many of them on the market.
That's all for now. Please let me know
if you have any questions, general or specific, and I'll do my best to
help.
Goodbye for
now.
