Kaka'ako Condo Boom
Full speed ahead for new high-rise condo towers in Honolulu:
Kaka‘ako on the rise
By Andrew Gomes
Advertiser Staff Writer
Posted on: Sunday, October 30, 2005
With buyer demand driving Hawai'i's housing boom, developers have created a noticeable bulge in
Kaka'ako, where there are plans for 14 new residential towers with about 4,000 units.
The area's condominium development pipeline has gotten so fat that it easily should top Kaka'ako's residential high-rise boom of the late 1980s.
The pipeline also is big enough to elicit a growing concern about overbuilding.
"We don't even have a grocery store in the close vicinity here," said Jennifer Gerard, a 15-year Kaka'ako condo dweller who believes live-work-play urban villages work well but worries that builders may be overdoing it. Adding 4,000 more condo units "does seem a little scary."
The latest condo tower plan moving ahead is from Kamehameha Schools, which recently sought a partner to develop a high-rise on land the trust owns on the mauka side of Ala Moana, between Coral and Cooke streets.
With as many as 290 units, the Kamehameha Schools project is helping cement Kaka'ako as Ground Zero for urban housing development.
City planners predict that Kaka'ako will be one of the fastest-growing residential neighborhoods on O'ahu over the next 25 years, with more than 25,000 people moving in, increasing the neighborhood population by 178 percent.
The expected growth has raised concerns ranging from noise to aesthetics to increased traffic, though "new urbanism" advocates say congregating residents in the urban core close to where they work can help reduce suburban sprawl and the commuter jam.
One of the reasons for Kaka'ako's expected bumper crop of housing is that the area is largely zoned for high-density residential use and populated by many less desirable, run-down light-industrial businesses.
Fourteen condos planned for the area would deliver a little more than 4,000 units to the market by roughly 2010.
Six are under construction, and the first is scheduled to be completed by the end of this year.
All the activity is on pace to exceed the previous condo-tower development rush in Kaka'ako during the last real-estate boom, which unexpectedly went bust in the early 1990s.
Some observers wonder if enough demand will exist to supply the current crop of high-rise builders, or whether some might meet fates similar to those of Hawai'i developers such as Jack Myers and Bruce Stark, who ended up with stalled or failed projects after the last boom.
Developers feel more secure, believing that there won't be a market collapse like the last one, which financially devastated some of the best in the industry and turned plans for gleaming luxury towers into parking lots for more than a decade.
"Within the next five years, the face of Kaka'ako will change dramatically," said Bob Oda, Kamehameha Schools regional planning project manager. "There is a bright future ahead of us in Kaka'ako."
Oda's optimism, which he shared at a recent Building Owners and Managers Association Hawai'i meeting, is echoed by other developers.
One of the most active in Kaka'ako is Honolulu firm Alexander & Baldwin Inc., which potentially could be involved in six of the 14 planned Kaka'ako high-rise projects.
A&B was an early investor in Hokua, the first tower to break ground during the current real-estate cycle and to test the market's strength.
Co-developed for $210 million by local firms the MacNaughton Group and the Kobayashi Group, Hokua's 248 units nearly sold out in late 2002 at an average of $1 million per unit. Construction started in 2003 and is expected to be finished by year's end.
Hokua was closely followed by Ko'olani, by Florida-based luxury home builder Crescent Heights, which expects to finish the project early next year and begin work by March on an adjacent sister tower.
Another multitower developer is KC Rainbow Development, which two years ago disclosed plans for a 706-unit, twin-tower project two blocks 'ewa of the Ke'eaumoku Street Wal-Mart.
Allen Leong, KC Rainbow operations director, said the company initially planned to build the second tower after the first, but decided to build them concurrently because of stronger-than-anticipated buyer demand.
"The sell-through was real strong," he said, noting that nearly all 706 units are sold, with plenty of backup reservations to replace buyers who may cancel before construction is finished and sales close in January 2007.
Inspired by such demand, KC Rainbow arranged to build a third high-rise, a roughly 400-unit tower on Kapi'olani Boulevard, makai of McKinley High School. That project could start next year, with a target unit price under $500,000 if construction costs allow.
The biggest Kaka'ako condo developer could be A&B, which this month reached a preliminary agreement with the state to develop three towers near Kaka'ako Waterfront Park.
A&B also recently started construction on Keola La'i, a 352-unit condo makai of The Honolulu Advertiser news building, and is believed to be competing with Crescent Heights and at least one other developer to work with Kamehameha Schools on its Ala Moana project.
Kamehameha Schools is evaluating proposals and interviewing prospective developers but hasn't made a selection. The project isn't expected to break ground until at least 2007, after leases expire for tenants on the property that include Porsche and Volvo car dealerships.
If the project proceeds, it would be the first residential high-rise for Kamehameha Schools in recent history and would represent a bet by the state's biggest private landowner that the strong housing market will last at least several more years.
Later, Kamehameha Schools may seek to develop a second Kaka'ako parcel bordered by South, Keawe, Halekauwila and Pohukaina streets, though there are no immediate plans, according to spokesman Kekoa Paulsen.
"It is definitely one of those parcels we will get to once the others that are in the queue right now are up and running," he said.
Despite all the condo plans, there appears to be interest to develop more. Paul Kosasa, chief executive of convenience-retailer ABC Stores, said he's been solicited by developers since ABC bought a South Street parcel in June for future distribution center use.
"I got a lot of phone calls, nothing solid, but people want to develop condos on our parcel," Kosasa said. "I just listen."
Not all the planned condo towers may rise, depending on changes in buyer demand, interest rates and construction costs — all of which have been rising. Other major factors include availability of financing and permitting.
For instance, Advertiser owner Gannett Co. Inc. in June solicited development proposals for the land under its news building at South Street and Kapi'olani Boulevard, suggesting a partner could capitalize on the strong condo market. But Gannett held off in responding to several bids, and the development initiative is in a "holding pattern," according to project broker Grubb & Ellis Co.
Many observers question whether some Kaka'ako condo plans will implode like several did at the end of the last market cycle, which forced some developers to cancel or suspend projects that were largely sold or under construction.
Developers affected by the last market swing included Nauru Phosphate Royalties (Honolulu) Development Inc., which began building Hawaiki Tower at Pi'ikoi and Waimanu streets in 1993, halted construction for three years, finished the tower in 1999 and sold the last unit in 2002.
A Japanese developer got stuck with a condo foundation and an $80 million mortgage in its effort to build a Queen Emmalani Tower on South Street. Following a forced sale last year, the site was bought by A&B, which is using the previously laid foundation for Keola La'i.
Another South Street block was envisioned by former local developer Stark in the late 1980s as a luxury condo called Waterpark Towers.
Mauka of Stark's One Waterfront on South Street, the $110 million Waterpark Towers pre-sold all 304 units at prices from around $400,000 to $3 million, but the market turned before construction was to begin in 1991. Stark and partners tried to reposition the project with unit prices as low as $180,000, but the effort failed, helping push Stark's company into bankruptcy.
Could this market result in similar casualties? Local industry consultant Ricky Cassiday says he doesn't believe so. "I just see a lot more demand for new condos than there is supply," he said.
Cassiday said this market boom is more sustainable because buyers are primarily local residents moving from the suburbs and Mainland baby boomers buying retirement property or vacation condos.
"They're not so much speculative investors," he said, comparing the current buying wave with previous demand largely driven by Japanese speculators who stopped buying when Japan's economy fell into recession.
Hawai'i's previous housing market crash also was driven by the Gulf War, a slowdown in California's economy, and local population and job losses.
The current housing boom could be derailed if interest rates move much higher, though Cassiday said he expects the Federal Reserve not to spur rates that high because that could damage the national economy.
Rising construction costs also could hamper the market, but Cassiday said he expects developers to find ways to keep unit prices attractive to buyers.
"The market has a lot of potential to absorb most of these projects," he said.
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