WESTERN SNAPSHOT, DECEMBER 2007

Hawaii Condominiums

Hawaii’s residential condominium market benefited from the economic boom that has spurred record sales and a dramatic run-up in median condo prices. Since 2002, median condo prices for Honolulu have risen an impressive 117 percent from $150,000 to $325,000 for 2007 year-to-date.

On a price-per-square-foot basis, Honolulu condos are currently selling at around $500, and new condominium sales are commanding $600 to $700. Annual unit re-sales for Honolulu peaked at 8,156 in 2005 and still remain strong, with 4,291 resales recorded in 2007 year-to-date through September. The year should finish with roughly 5,800 condominium resales, which although down 28 percent from the peak 2 years ago is still in record-high territory historically.

In addition to a vibrant business environment, where more than 40,900 jobs were generated since December 2001 and average wages have increased 4 percent per year, Hawaii has also benefited from strong performance by the tourism industry. Visitor arrivals have hit record levels, increasing from 6.3 million in 2001 to almost 7.5 million in 2006. Additionally, private building permit volume rose to a record $1.6 billion for 2006, and more than $10 billion in federal military expenditures are slated for improving military housing in the state.

These rosy economic conditions attracted developers to meet the pent-up demand for residential condominiums. Since 2001, more than 3,000 high-rise upscale and luxury units have been built in urban Honolulu. The first projects were immediately sold out with subsequent projects enjoying similar success. For many of these projects, opening sales day was characterized by long lines of interested buyers, some camping out overnight for a chance to purchase units costing from $500,000 to $1 million and higher.

The upscale project Koolani closed sales on 368 units in early 2006 at an average of $870,000 or $656 per square foot, and 2007 resales have been at $742 per square foot. The luxury project Hokua sold 244 units in January 2006 at an average of $1.078 million or $571 per square foot and immediately began recording resales averaging more than $1.5 million or $827 per square foot, with re-sales in 2007 now exceeding $1,200 per square foot.

Presently, the speculative fervor of the past few years has abated, and long lines at the sales office are seen only at mid-market and affordable projects. Nonetheless, condos in all price ranges are still selling at a healthy pace. Unfortunately, with all this rapid growth, inflationary pressures are boosting costs across the board and are likely to dampen future economic growth. In urban Honolulu, the shortage of available developable land has boosted land prices to 20-year highs. A South Korean construction company paid more than $400 per square foot to purchase a parcel adjacent to popular Ala Moana Shopping Center. A shortage of skilled construction labor has resulted in sizeable jumps in construction costs. In fact, the State of Hawaii’s economists pegged high-rise construction costs as having jumped more than 18 percent in the past 2 years. Financial feasibility studies are indicating that residential developments will have to sell units in excess of $600 per square foot in order to make future high-rise residential condo projects viable. It’s not unheard of to be quoted a $400 per square foot construction cost estimate for a high-rise tower.

As a result of these financial calculations, most developers have focused on selling to the luxury condominium marketplace. Honolulu’s real estate market has benefited from the rising tide of empty nesters and retiring baby boomers. Additionally, Asian investors are re-entering the market with Japanese, Korean and Chinese investors seeking their piece of Hawaii. In fact, the Trump Tower Waikiki sold out all 464 units in one day to predominantly Japanese buyers. That was at an average unit price of $1.5 million for a project total of $700 million, a world record for new project single-day sales.

Spurred by the strong real estate market and limited developable land, several older apartment buildings and hotels have been converted to for-sale condo units. The State Department of Commerce and Consumer Affairs reports a steadily growing number of conversion projects during the past few years, adding a rough average of 1,600 units per year to Hawaii’s existing inventory of 140,000 condo units.

The economic forecast for Hawaii calls for continued growth at more moderate rates than in the past couple of years. The real estate market is expected to show flat to moderately increasing prices in the next year or two. A continued slowdown in activity is anticipated but not to the extent experienced in many of the U.S. mainland cities. Hawaii has been fairly insulated from the subprime woes facing many residential markets. Its foreclosures ranked 43rd in the nation, with roughly one filing per every 925 households, well below the national average for credit risk. Although U.S. real estate investors planning on capitalizing on rapid price appreciation are rethinking this market, the improvement in the Asian economic outlook should boost interest from international buyers.

Mike Hamasu is director of consulting and research at Colliers Monroe Friedlander Inc., and Dan Tabori and John Jacobsen are executive vice president of business operations and senior research analyst, respectively, at Prudential Locations LLC.

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