First Hawaiian Bank: Hawaii/Guam

September 19, 2006

FIRST HAWAIIAN BANK ECONOMIC FORECAST - Kauai

KAUAI ECONOMY CONTINUES TO BE STRONG, LED BY TOURISM, CONSTRUCTION SECTORS

(Poipu, Hawaii, September 19, 2006) – Kauai County is exhibiting continued strength in 2006, First Hawaiian Bank Economics Consultant Leroy Laney said today at the bank’s 32nd Annual Business Outlook Forum at the Grand Hyatt Kauai Resort & Spa.

“Major pluses for Kauai include visitor growth and spending, which continue strong this year, a continued boom in construction activity and the benefits of activity at the Pacific Missile Range Facility at Barking Sands,” Laney said. “However, the Garden Island is not totally problem-free. There are signs of a slowdown in the real estate market, with sales off dramatically in the first half of 2006. And the flip side of the long expansion is that it has created an extremely tight labor market that makes it hard for employers everywhere to find people to hire.”

Laney made these comments about various sectors of the Kauai economy:

‘Help Wanted’ – But Hard to Find. “Everyone everywhere on Kauai mentions not being able to find employees. Kauai's rate drop in unemployment has been even more dramatic than the state as a whole. Traditionally, Neighbor Island jobless rates are higher than Oahu's, but that gap is closed now for Kauai. Job growth has decelerated in the last couple of years, simply because workers are harder to find. That will continue to be one constraint on the current expansion.

Tourism is Strong: “Kauai visitor growth has been accelerating in the last few years and arrivals rose nearly 10 percent in the first half of this year. In early 2006, the industry was hit by the heavy rains in the spring and publicity surrounding the Kaloko dam tragedy, but the summer months have been quite strong. Visitor spending has been keeping pace with arrivals. It was up 7.8% last year and 7.7% through the first half of 2006.”

He noted these other tourism-related developments:

Independent vacation rentals are much more important on Kauai than on other islands. A recent survey identified 763 such units island-wide.
More hotels are converting to condotel and time-share, which is far more important for Kauai than elsewhere. The Kauai Beach Hotel & Resort is going condotel, and plans are now for the rebuilt Coco Palms to be mainly time-share and condos.

Construction Boom Continuing: “Previously permitted construction projects -- both residential and non-residential -- are now coming out of the ground all around, tangible evidence that the Kauai construction boom is continuing. There seem to be enough projects in the pipeline to sustain the industry for at least the next several years. This sustains the demand for construction jobs, and higher paying jobs in this sector are making life harder for employers in other sectors. Increasingly another hurdle – higher construction material costs –makes bidding on projects much harder and adds upward pressure to final prices.”

A few of the projects underway:

The 150,000-square-foot Costco adjacent to Home Depot. Its opening is imminent.
The 190-unit Waipouli Beach condo project in Kapaa.
Grove Farm’s Pikake subdivision.
Princeville’s 102-unit Brookfield project and the 200-unit Bali Hai expansion.
The bypass road relating to the 1,500 unit A&B and DMB Associates southside project.

“Building booms don’t last forever. A recent slowdown is noticeable in Kauai single-family residential permits. Along with a slower permit process, interest rates have risen some,” Laney said.

Residential Real Estate: “The Kauai real estate market has seen a big change over the past year. In the first half of 2006, single-family sales were down almost 30 percent from the same period a year ago. Some of this reflected lower inventory, but that certainly wasn’t the whole story. The speculators are mostly gone -- and those wanting a home to live in have been on the sidelines more, watching prices closely. Median prices have continued to rise, but at a much slower pace – up just 13 percent in the first half of 2006, after annual increases of over 28 percent in 2005 and 37 percent in 2004.”

Laney said real estate markets normally rise in price and then plateau for a few years, without drastic declines that sometimes occur in other asset markets. “But mild drops do happen; from 1990 through 1997 on Kauai, for example, there was a cumulative 11.6 percent drop in median single family prices,” he said. “This price deceleration is actually welcome news; no market can sustain those steep increases year after year, nor would we want it to, because it makes it impossible for those who just live and work here to afford shelter.”

Pacific Missile Range: “The economic importance to Kauai of the Pacific Missile Range Facility at Barking Sands is often underestimated, but it has an annual budget of $150million and a high tech sector on Kauai would be virtually non-existent without the sub-contractors there. There are 880 workers associated with the range, mostly contractors or government civilians. Only 75 are active-duty military.”

Agriculture: “Agriculture traditionally has been an important sector of the Kauai economy, but in recent years it has gone through a dormant period. That may change some when the Tropical Fruit Disinfestation Facility near the airport gets started again, hopefully by early 2007. The main beneficiary will be papayas, but other tropical fruits could also benefit.”

Ethanol: “Skyrocketing energy prices have focused more national attention on ethanol as a fuel. Hawaii’s sugar plantations have been considering ethanol production for several years now, and this year a couple of developments involve Kauai. Grove Farm is partnering with Maui Land & Pine and Kamehameha Schools to research the best types of crops, production processes and feasible timelines to bring this fuel to Hawaii. And Gay & Robinson is joining PacWest LLC to build a 12 million gallon per year ethanol plant using sugar as a feedstock, possibly on-line by early 2008.”

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