FIRST HAWAIIAN BANK ECONOMIC FORECAST - Maui

MAUI ECONOMY STILL GROWING, BUT MORE SLOWLY
Turn in Housing Market, Slowdown in Tourism Reduce Pace of Expansion;
On the Plus Side, Construction Industry is Still Booming

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(Kahului, Hawaii, September 14, 2007) - Several things have happened on Maui over the past year that have put brakes on the county's economy, First Hawaiian Bank economics consultant Leroy Laney said today at the 33rd Annual First Hawaiian Bank Economic Outlook Forum at the Maui Beach Hotel.

• He made these comments about major economic sectors:
• Maui's strengths: Continued construction boom and low unemployment rate.
• Signs of a slower pace: Downturn in the housing market after years of “phenomenal” price increases, slowdown in tourism, harbor overcrowding and county public policy moves (including new housing ordinance) that will have an effect on the economy.

“Thus, the Maui economic picture is somewhat more downbeat in 2007 and 2008 than in recent times,” Laney said. “However, ow remember that any economic cycle inevitably contains periods of cooling down; it's required for infrastructure to catch up and for slowly rising incomes to help bring affordability back.”

• Housing: “We've warned about an impending turn in the Maui real estate market for a couple of years. In 2007, it's happening. It's hard to overestimate the effect that a dampening of real estate has on the overall economy,” Laney said, noting that:
• The market obviously affects construction.
• Home furnishings and durable goods sales decline along with home sales.
• General retail spending suffers if people feel they are worth less on paper - and their home is usually their biggest asset.

“Escalation in Maui home prices has been phenomenal - almost 26 percent in 2004 and almost 23 percent in 2005. In 2006, the market began to soften when the annual increase was only 2%. The median Maui single-family home price was $693,000 in 2006 - highest in the state'” he said. “For the first half of 2007, prices are off about 10%.

“Once cooling starts, it usually doesn't reverse in just one year, though there usually aren't sharp declines, just a plateau with mild oscillations in price.

“The previous run-up for Maui home prices came to an end in 1993, as the Japanese-driven speculative boom was in its last throes. From then through 1997, there was a decline of over 16 percent in Maui single-family home prices. The present run-up in prices brought a staggering 200 percent rise from 1997 to 2006.

“Such acceleration can't be good for any economy, and thankfully it doesn't continue forever. In fact, the faster and higher it goes, the greater the subsequent correction usually is.

“All this does not mean that real estate is a bad investment, even today. Let's assume someone was 'unlucky' enough to buy at Maui's 1993 peak. They might have kicked themselves for the next 4 or 5 years as they saw the value of their home decline. But had they held on until 2006, they would still have seen a 150 percent appreciation -an annual gain of 11.5 percent.”

Construction: “Maui construction is still booming. Several Maui builders report they will be busy for at least the next several years, but there are signs of a cooling off further down the pipeline,” Laney said. He noted a slowdown in building permit growth beginning in late 2006 and continuing this year.

“Builders report that the permit process is getting longer and harder; a more involved bureaucratic process, with the involvement of more agencies, gets most of the blame. There is also an underlying anti-growth sentiment on Maui, a natural outcome of the recent construction boom,” he said.

“Many developers mentioned another factor - the 2006 County ordinance that increased the affordable housing component for new projects to 50 percent of all units. This means that builders must make their profit from a smaller percentage of market-priced homes, which could have the unintended result of actually reducing the total supply of new housing for Maui residents. The ordinance adds to the list of things that will slow Maui construction as time progresses.”

Job picture: “If the Maui economy is slowing, you couldn't tell it from the unemployment rate. The state's labor market may be tight, but Maui's is even tighter -- and actually seems to be getting more so. Maui job growth has showed signs of slowing, though some of that is due to the labor shortage.”

Tourism: “In 2006, Maui's visitor industry had a very good year. Total arrivals grew 4.6 percent, despite a flat year for the state as whole. Maui excelled in total spending in 2006, with 10.7 percent growth. Clearly, Maui's reputation as a destination for upscale visitors paid off. However, during the first half of 2007, Maui lagged all but Oahu in arrival growth.”

• Laney said trends toward more time-share units and condo hotels are apparent in changes in the Maui visitor plant, citing these developments:
• Kapalua Bay Hotel has been razed for a new property that includes both resident and transient units.
• Kapalua's Ritz-Carlton is being renovated, with plans for fewer guestrooms and the addition of residential suites
• The Renaissance Wailea Beach Hotel is being torn down for a luxury condo hotel resort under the Baccarat label.
• In Kaanapali, Marriott Ocean Club has just finished the first of two new time-share towers.
• Kaanapali Ocean Resort Phase II time-share development continues, and a Phase III is in the wings.
• In Makena, Dowling Company has partnered with Morgan Stanley Real Estate to acquire the entire resort property from Prince Resorts Hawaii. Eventual plans are likely to include more residential units.

Kahului Harbor issues: Laney said a key problem for Maui is “lagging harbor infrastructure. There is a clear consensus that the problems at Kahului Harbor - a lack of space and room to expand -- are worse than anywhere else in the state. Yet as dire as the waterfront problems are, land-side problems are even greater, with no space to accommodate cargo, cars, cruise passengers and other demands.”

He noted that Maui's population has grown 32.6 percent in the last 15 years, far outstripping harbor infrastructure growth. “Kahului Harbor is a modest three-pier facility built years ago for a plantation economy, not for a tourism-dominated island whose population has grown so fast,” Laney said.

Sugar industry: “Maui's lone remaining sugar operation, HC&S, reports that 2007 production is up some but prices are down from 2006. HC&S reports that, at today's energy prices, it is a toss-up between the return on sugar versus ethanol production. So the ethanol option is not being pursued aggressively, but is still being evaluated for the future,” Laney said.

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