Will the Kaka‘ako Condo Boom Ease Honolulu’s Housing Crisis?
With plans for new towers on hold (and a splashy luxury condo scratched), experts are arguing if we’re in a lull or a bust. Either puts an end to the idea that Kaka‘ako would lead to a housing solution. A closer look at O‘ahu’s most intractable issue.
Photos: Aaron Yoshino
We’ve gotten so used to the cranes doing their dip-and-peck dance in Kaka‘ako, dominating our skyline and the conversation, that it comes as a bit of a shock now that the dust is settling. After all the fuss, the new towers have barely made a dent in Honolulu’s acute housing shortage. Surely, after so many units built (3,971, including those under construction), we should be seeing some relief by now. But no. Instead, rents are up and housing prices are setting records every month. What happened?
We’ve actually lost ground, given that Hawai‘i needs about 5,200 new units a year, according to state economist Eugene Tian. But, in 2015, the number of units completed sank to a low not seen since 1947; the state granted just 800 permits in 2014, also a low. Finally, while we’re certainly grateful for the 1,865 units set aside in Kaka‘ako as affordable or “reserved,” the latter’s income levels seemed unrealistic, favoring the better off, considering the all-important reality of what the average resident can afford.
Maybe we’ve let the new Kaka‘ako distract us—all the Howard Hughes towers and promise of “live, work, play,” the artists lofts, Kamehameha Schools’ industrial-chic SALT complex, movies on the lawn, ice skating, Pow! Wow! murals, and hipster food and drink offerings. Fun stuff. But Honolulu, O‘ahu and the state overall haven’t built housing to keep pace with a rising population, so we’ve been boxed in. And, while we love our ‘ohana, too much togetherness is beginning to wear on us. We’re being squeezed financially to pay the rent or the mortgage, or being squeezed into too little space with too many other people.
One effect of the shortage is predictable: The price of housing keeps going up and is staying up. Rentals, too, shot up more than 10 percent over the past two years. “I’ve seen a 30-percent appreciation in the better neighborhoods three years in a row,” says appraiser and real estate expert Stephany Sofos. “Everybody says we’re not in a bubble. We’re in a bubble.”
It may be hard on real estate developers when it pops, but the end of a bubble is usually a good thing for renters or buyers. But the moment we are in today seems different from, say, the 1980s or 2009. People in the know seem to be saying that the bubble will continue, but the construction of new units will end.
Why? Costs are in a bubble, too. And then there’s the paradise tax: “On the most isolated island in the world, everything needs to be imported,” says Stanford Carr, who started out a flooring contractor and now heads his own development company, which has built luxury housing from Hawai‘i Kai to Maui and the Big Island but has recently focused on Kaka‘ako, pulling off several complicated projects for low-income residents. “Our challenge here is the freight will cost more than the materials.”
“When you have a very hot construction market like you do now, the costs of your materials and equipment are too high,” explains Ryan Harada, principal at Downtown Capital LLC, developer Marshall Hung’s company. Downtown Capital specializes in workforce housing, not luxury units. “We were very fortunate to get into the market at the right time,” says Harada. “We completed our 801 South St. Building A in June of 2015, and we finish Building B in January of 2017. Our costs are locked in, so we’re still within the sweet spot.”
And then? “After that,” Harada says, “I don’t see the market doing much—there will be a lull for a few years. Especially the luxury market. These things go in cycles. Sometimes you go five, 10 years without anybody building. It all comes to a close in 2017.”
On the heels of a boom and a concurrent shortage in Hawai‘i housing, we can now expect future housing development to just dry up. Wait, what?
Future historians may note Jan. 16, 2016, as the day illusions of solving O‘ahu’s housing crisis anytime soon were laid to rest.
Eight months before, in May, developers started taking deposits on a luxury high-rise called Vida at 888 Ala Moana, with units priced from $1.8 to $3.3 million and amenities that included two pools, a gym, a yoga room, movie theaters and private dining rooms (with chefs), guest suites for visitors, play areas, storage areas, even a “tool workshop.”
Vida wasn’t the ritziest address in the strip that stretches along Ala Moana and Kaka‘ako—that honor goes to Park Lane and its $22-million to $28-million penthouses. But when buyers rushed in to grab 40 percent of its units in the month of May, the local condo market seemed certified golden for the next decade, with plans for up to 20 new high-rise towers on the books of major players like Howard Hughes and Kamehameha Schools. Brokers gushed: “Kaka‘ako will be Hawai‘i’s fastest growing and most exciting new market for some years to come,” tripling in size to 30,000 residents.
Vida’s developers, The MacNaughton Group and The Kobayashi Group, are credited with sparking the current boom—back in 2002 with Hokua, a luxury condo. The first high-rise in Kaka‘ako in more than 10 years, Hokua sold out 95 percent of its units before groundbreaking, at an average of $1.1 million each. By the time all 247 condos closed on a single day in 2006, a development dash was on.
The housing shortage was news back then, too, but even so there were heated battles over the Hawai‘i Community Development Authority’s greenlighting so many tall, view-blocking towers, especially while repurposing hip and funky Kaka‘ako at price points that seemed directed at offshore investors, not local residents. But the HCDA is an authority, not a democracy, and developers carried the day again and again. Various rationales were offered: The luxury condos would be offset by 20 percent affordable housing; millennials prefer cozier urban environments where they can skateboard to work. Mayor Kirk Caldwell even painted more high-rises as a means to “Keep the country country,” by preserving ag land from development. (North Shore activists cried foul.)
Then came Jan. 16, 2016, and the Vida announcement that it was returning deposits and would never be built. That there hadn’t been a single sale since May warranted a gulp and a fresh look at reports of stalled luxury condo sales and frozen condo resales. Locations executive vice president Scott Higashi had signaled concern nearly three months earlier: “Certainly at the high price points, from $1.7 million and up, the market is tight. I don’t think there are enough buyers in that marketplace to support the inventory, and it has slowed.” By January, Higashi had scaled back that $1.7 million to $1 million and up.
The boom was over. And yet Stephany Sofos was still seeing a boom. And so were others, as long as they weren’t looking in the Kaka‘ako-Ala Moana districts. What the heck was going on?
A tale of two markets, it seems. And, possibly, a core problem: We’ve been building for everyone but ourselves.
kaka‘ako rising: The view from an affordable tower, Halekauwila Place, looks out on the new urban Honolulu.
Photo: Aaron Yoshino
Scarcity drives demand, of course, and in the City and County of Honolulu we are short 25,847 units of housing, according to a 2014 Department of Business, Economic Development and Tourism study. This probably explains why rents went up 10 to 12 percent in 2012 to 2014 and why single-family-home prices, after a 23-percent hike from 2011 to 2014, have broken records, recently topping $700,000. It doesn’t explain why luxury condos are languishing.
“Low demand,” says Ricky Cassiday, a real estate consultant who has tended his own sales/price database since the 1980s. “Low demand, when everybody and their brother wants to live in Hawai‘i? Yes, but can they afford it? Can we? No.”
Developers shifted from building houses to condos in the late 1990s. Unlike the great condo boom of the 1970s and ’80s, which was local and utilitarian—no yoga rooms, no movie theaters and no requirement to supply two parking slots per unit—the new developments were not aimed at households making the area median income. In 2015 that was $86,900 for a family of four, which, with a 10-percent down payment, gets you a $336,000 mortgage.
There are no $300,000-to-$400,000 condos in Kaka‘ako, except for the subsidized, which are either affordable (for low-income people, or those making a reduced percentage of the AMI) or workforce (those making between 100 and 140 percent of the AMI). Also, that family of four could be going up against a single person, who can make up to $85,150 a year and still qualify. Without the costs of an ‘ohana, he could also enjoy higher odds of qualifying, since the more money a person nets over expenses, the easier it is to get mortgage approval and, also, to accumulate a down payment.
Right now, all this is moot given the cost bubble. “We could never afford to build our last affordable rental today,” says Stanford Carr. He’s talking about Halekauwila Place, with 204 units for renters making 60 percent of the AMI, or $40,000 for a single person and $57,000 for a family of four, which broke ground in January of 2013. “We need more of this kind of housing, we need thousands more,” says Carr.
But what we have are plenty of units with a starting price of $1 million.
When you add in the $1,000 a month maintenance fee that comes with a million-dollar condo, the odds of meeting someone from your high school in the yoga room fall faster than a 45-floor elevator.
So, not so local, these places.
Those who’d protested Manhattan-style urban development had been skeptical of the promise that the rising tide would float all boats. The tide was rolling, all right, right back out to sea. Vacancy rates for condos above 50 units in Honolulu (18 percent) are already three times that of single-family homes (5 percent), reflecting their use as vacation or part-time housing, according to DBEDT studies.
It raises the obvious question: Who are these other people? The ones buying them, and now, not buying?
“Hawai‘i is not just a local market anymore,” says Sofos. “It’s a global market. That’s what local people don’t understand. We’re an international hub.”
That may seem chaotic and weird—a déjà vu to the 1980s when billionaire Genshiro Kawamoto drove around Kāhala in limos packed with suitcases of cash. This time the cash-rich investors are Chinese, many real estate insiders will say flatly, before demanding anonymity.
The number of millionaires in China rose by 60 percent in 2013, according to a study by The Boston Consulting Group. But China also is a difficult place to hang onto your money. Bank interest is minimal, and land bubbles and scandals make owning or developing investment real estate hazardous to your health.
Ever since the mass exit of moneyed Chinese from Hong Kong in 1997, China has tightened restrictions on currency transfers. But the authorities haven’t limited buying or starting an overseas business, so there’s been an absolute gold rush (that favored phrase of real estate sections) of Chinese investment around the world, including the creation of entire cities from scratch in South Africa and Malaysia.
Maybe the $40 billion island “eco-city” north of Singapore has distracted them, but, in Hawai‘i title searches, only 15 Chinese buyers showed up in 2014 and 31 in 2015, compared to 11,000 buyers from the Mainland. It feels strange to find that the Chinese have bought so little Hawai‘i real estate. After all, China became the No. 1 international purchaser of real estate in the U.S. last year, according to the National Association of Realtors, spending $28.6 billion, an average of $831,000 per home.
At the same time, Google coughs up pages of local multilingual asset management services offering relocation services and even college admissions advice, including Choi International at Christie’s, Sotheby’s and, yes, The Trump Organization. To judge from the client testimonials on Asian specialist websites, Hawai‘i attracts gas and oil CEOs, doctor and nurse couples, food scientists, nuclear and self-identified “Facebook” engineers, who’ve all bought recently. In April, the Asian Real Estate Association’s Global+Luxury Summit at the Royal Hawaiian offered days of seminars (“Resorts and Second Homes,” “Battle of the Millionaire Agents,” “Home Sweet (Second) Home”), speakers on the latest geopolitical developments including Chinese currency restrictions, developer showcases (featuring executives from the Kobayashi Group, Howard Hughes and A&B Properties Inc.) and field trips to Honolulu and Maui properties.
All this real estate infrastructure for 31 sales doesn’t seem like an effective allocation of resources, does it? Unless it’s all being handled under the radar. Indeed, “There is a suspicion that they’re registering under a Hawai‘i resident LLC,” a limited liability corporation which can mask owner identities, says Sofos, “and buying apartments as a rental business.” As a sign of its concern about the abuse of LLCs, in 2016 the U.S. Treasury Department began requiring full transparency of all-cash real estate purchases above $1 million in Miami and $3 million in New York City.
Carr doesn’t see an influx, saying, “Ninety-eight percent of our buyers are local. We know by the zip code.” But then, luxury buyers are hardly going to be looking at the low-frills kind of development built by Carr, Hung and Peter Savio, another longtime developer who just opened Rycroft Terrace as an affordable for-sale condominium. Carr does see immigrants and visa holders, however. “Many foreign buyers out there are residents that have been buying existing units or moving up. They may be Chinese or Korean nationals, but they’ve been here for a long time.”
Nobody’s saying the Chinese shouldn’t be a part of the Hawai‘i market. The world’s largest economy is on our doorstep. “These people come in and they really do help the overall economy,” says Sofos. “They are consumers. They shop till they drop, they love the retail therapy and going to the restaurants—all the restaurants, not just the fine restaurants. You see them at Puka’s at Whole Foods, drinking coffee at Starbucks. They have the discretionary income to support the overall economy.
“I personally don’t mind them coming in, because they’re polite. They’re well meaning. And they’re clean—they don’t litter. Local people litter,” she says.
The Chinese do make regulators nervous. In March, Chinese insurer Anbang topped a bidding war with Marriott International over the Starwood Hotel & Resorts Worldwide chain. Had they not pulled their all-cash $14 billion offer at the last second, Anbang would’ve owned The Royal Hawaiian and the Sheraton Waikīkī hotels.
And so we ask: Are they really here, the condo buyers? Anecdotally, yes. But, despite all the shadowy theories, including the popular exercise of standing in front of a condo at night and counting how many units are dark, it’s difficult to say there’s proof. Except that all those condominiums do look awfully dark at night. And all those apartments are off the market for residents.
Photo: Aaron Yoshino
If not the Chinese, then who? Who’s the real driver of the boom?
Maybe you guessed it.
Every developer we spoke to references the unique psychology of Islanders: Thrifty, real-estate-loving O‘ahuans take their house equity—paid off over 30 years—to buy condos. Not only are apartments assets that offer a return if rented, they can provide family housing (for the children) that then becomes retirement housing for the parents (giving the kids the big house when they have keiki). And, if you do have to sell, the asset appreciates nicely. This is Hawai‘i, after all.
Of course, nobody here wants to pay for all those amenities and, thus, all that maintenance. (I got my own tool workshop, yeah? It’s called the carport.) We buy the low-frills condos. And if we can get our name or a keiki’s name on a workforce or even a low-income unit, we’re on it. On. It.
In other words: Those of us who are smartest at doing better are making it harder on the rest of us. And the impact feels bigger because there are so few ways to make money here, with low wages and salaries that have fallen in comparison to the rise in home prices and the cost of living. The national income inequality squeeze is pronounced in Honolulu, and the pain is real.
So the solution is on us, too. “We need the political will to create more housing,” says Stanford Carr, Ryan Harada, Ricky Cassiday and everyone else in the game.
What next? Not much.
Vida may have tapped out first, but, over at the Hawai‘i Community Development Authority, Lindsey Doi knew change was in the air: “Honestly, we have no pending permit applications. None are complete, none scheduled for public hearings.”
Thirteen sites, most condo towers, received permits in 2013 and 2014, says Doi, HCDA Asset Manager and former compliance assurance and community outreach director. “That was the height. Now you see about seven under construction. Potentially, six more could be coming up in the next year—it takes two years from approval to start construction.”
Potentially. The word hangs heavy. “Any high-rise development is risky,” Downtown Capital’s Harada says. “You have a two-year window: If you start a project, you have to finish it. Once you start going vertical, you can’t stop and wait for the market to improve. Not like a residential subdivision.”
Will we see more condo towers? “When the announcement came that nearly 18 towers were in the planning, one had to wonder if the market existed,” says James Wright, owner of Century 21 All Islands. “Nearly 3,500 new units, that’s approaching 40 percent of the total market. We’re oversaturated and not competitive.”
But if the units are affordable, the demand is there. Howard Hughes drew 5,000 applicants to its mortgage workshops for 375 units at its Ke Kilohana reserved housing tower at 988 Halekauwila St. Yet a source who has his fingers on the pulse of real property tax-assessment data says, “Anything not built by the end of this year or the beginning of next year won’t get built.”
Which sounds bad, given those 25,000 homes we need to meet demand on O‘ahu. It sounds even worse when you hear we’re short 19,000 units for low-income households; that we’ve only built 4,500 affordable rentals from 2004 to 2013; or that, according to Cassiday, the compound annual appreciation of homes over the past 35 years is 5 percent, 4.7 for condos. During the same period, he says, the appreciation of wages was 4.2 percent. A 2014 study puts the number of Honolulu households that qualify for affordable rental housing at 46 percent.
“One in five of us qualifies for affordable rentals,” Cassiday says. “One in 20 of us rents affordable housing.” That’s 5 percent of the 90,000 households that could use help.
Put them all together and you have our current conundrum: Just as demand is reaching new highs, wages are stalled and development of new housing is grinding to a halt. Plus, demand for luxury condos is flat.
All that construction, it seemed, had been aimed at investors, second-home owners and those Islanders who could afford to drop a million down on a cool condo with a tool workshop and the amenities of a resort. They didn’t show up. Now, with economies slowing worldwide, especially in China, Kaka‘ako is looking like a glossy attraction that distracts us from the reality of more homelessness, more generations doubling and tripling up in single-family homes and, always, higher prices for less space. A 14-year building boom that didn’t help residents? And won’t help our children?
What does political will look like, in a housing market dominated by luxury construction and undermined by all of us who are so akamai?
Maybe we’re about to find out.
The Rate of Housing Construction Has Fallen Since the Early 1970s.
infographic courtesy of Ricky Cassiday
Affordable Development After Kaka‘ako
If Kaka‘ako won’t solve the housing shortage, what might? Subsidies made affordable Kaka‘ako go—cheap land, or higher zoning densities than allowed elsewhere. Now, says the HCDA’s Lindsey Doi, “We have no more state land to give.” In addition, luxury builders are balking against any more unflashy concrete-block towers adjacent to their luxury offerings.
Stanford Carr is talking to Kamehameha Schools about low-income housing in Kapālama. Closer to town, Carr, Marshall Hung, Rycroft Place developer Peter Savio and others may try to aggregate small parcels of land in the aging condo corridors along the Ala Wai and in McCully, Makiki and Mō‘ili‘ili. The drawback is these areas lag in terms of infrastructure, unlike Kaka‘ako, which received hundreds of millions of sewer and other upgrades in preparation for development.
That leaves TOD, transit-oriented development, along the 21 rail stations. Carr’s Keauhou Place includes a downtown rail stop and he finds the possibilities intriguing. “Each station is potentially a retail and condo hub that will create body heat,” that is, commerce and street life. Like a relay team passing the torch, the 21 stations could deliver an economic boost, in stages, hopefully keeping Honolulu’s economy on the boil.
The glitch: Unlike in Kaka‘ako, the state doesn’t have the money to underwrite sewers and other infrastructure for rail, pushing it on developers. If taxpayers do foot the bill, it will add another billion to the rail project. If they don’t, TOD may be DOA outside of the urban core.
Anatomy of a Condo
Who’s buying? Who’s flipping? We dug into the Bureau of Conveyances data for one of the new luxury condos to get a snapshot of Kaka‘ako’s condo boom.
ILLUSTRATION INDICATES PERCENTAGES, NOT ACTUAL LOCATIONS IN BUILDING.
PHOTO: COURTESY OF THE KOBAYASHI GROUP
One Ala Moana, opened November 2014
Builder: The Kobayashi Group and The MacNaughton Group.
Owner/developer: Howard Hughes Corp.
Top Selling Point: Located atop Ala Moana Center (old Nordstrom), near Ala Moana Beach Park. Opening prices All 207 condos sold, most $1 million to $2 million, 54 units priced under $800,000 (floors 8 to 14); 6 penthouses at $22.8 million each remain.
What’s Gone Up
One Ala Moana, 2014
Halekauwila Place, 2015
801 South St., 2015
Symphony Honolulu, 2016
400 Keawe, 2016
The Collection, 2017
Keauhou Place & Lane, 2017
Park Lane, 2017
Ke Kilohana, 2018
Will Break Ground Soon
803 Waimanu, TBD
48% The number of houses sold on o‘ahu for cash in the first quarter of 2014
10-12% Rent increase, in Honolulu past two years
90,000 The number of renters qualifying for one of 5,900 public subsidized housing units in Hawai‘i
56% The number of 2015 house sales to international chinese in the u.s. that were cash sales.
13 sites permitted
7 towers under construction
6 towers, permitted, not yet under construction
0 applications pending for new condominiums
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