FIRST HAWAIIAN BANK ECONOMIC FORECAST - Kauai

KAUAI COUNTY ECONOMY REMAINS STRONG IN 2007
Construction Boom, Tourism Growth Lead the Way

(Poipu, Kauai, Hawaii, September 27, 2007) - Despite a downturn in the housing market, the Kauai economy remains strong -- more heated than the rest of the state, where a slowdown is occurring, First Hawaiian Bank economics consultant Leroy Laney said today at the 33rd Annual First Hawaiian Bank Economic Outlook Forum at the Hyatt Regency Poipu Hotel.

“There has been a staggering explosion of Garden Island construction, building permits remain strong and the island leads the state in visitor arrival growth,” said Laney, who is also a professor of economics and finance at Hawaii Pacific University.

Construction industry booming with tourism-related projects
“A lot of the activity in Kauai's booming construction industry is related to tourism. Statewide trends toward time-share and condo hotels are apparent in projects on the island,” Laney said. “The busiest place is Poipu, where a number of projects planned for years seemed to get final approvals simultaneously. It is often like that in building booms, when a knot of projects bring on a grand finale.”

Among the projects now going up in the Poipu area are: Royal Palms Condos (164 units), Pili Mai Condos (191), Koloa Landing (320), Wainani (70 single-family), Kiahuna-Poipu Beach Estates (108 lots) and Poipu Beach Hotel (125 rooms). In addition, Laney said, 1,500 units are planned in the Kukui'ula luxury development plus these others in the wings: Knudsen Estate's Village at Poipu (428 potential units), Kiahuna-Poipu Golf Resort (282) and 107,000 square feet at Poipu Town Center.

On the east side, he said, the Kauai Lagoons development near Lihue includes Kalanipuu Condos (78 units), Ritz-Carlton Residences (14) and the Ritz-Carlton Club (28). “Moving ahead with plans dormant for almost 20 years, new owners of Kauai Lagoons plan to spend $1.5 billion to complete the expansion of the 327-acre property,” he said.

“Plans to enhance Princeville Resort are coming to fruition. In 2008, Princeville Hotel will be upgraded to become the first St. Regis Hotel in Hawaii. Princeville Shopping Center is undergoing a facelift and planning continues for the resort's remaining 7,000 acres of undeveloped land,” Laney said.

“Though all of this is aimed at the off-shore market, Kauai County continues its emphasis on affordable housing. Housing aimed at the local market is being planned on the South side by Alexander & Baldwin, such as 60 single-family gap range homes at Kealaulu. A&B is also about to start on a 75-unit, multifamily component in the same area.”

Unlike other counties, Kauai's building permits remain strong
“One leading indicator of construction activity is building permits issued and Kauai permit growth is holding up well, signaling substantial construction activity likely to extend out several years,” he said. “Kauai is unique among Hawaii's four counties in this regard. Elsewhere, there has been a marked slowdown in permits issued.”

Kauai's visitor industry leads state in arrival growth
In 2006, the Kauai visitor industry had a very good year, Laney said, easily leading all other counties in growth in total arrivals. That trend that continues in 2007, with 12 percent growth in arrivals and a 6 percent increase in spending over the first half of the year, he added.

The future looks bright with non-stop flights added by ATA and Alaska Airlines, the first Alaska Airlines flight for Kauai and the first direct Seattle-Lihue flight. United plans to add its first Denver-Lihue flight in early 2008, he noted.

Housing market turndown finally happening in 2007
The long-expected turn in the real estate market is now happening on Kauai, Laney said.

“Escalation in Kauai home prices has been phenomenal -37 percent in 2004 and 28 percent in 2005. In 2006, the market began to soften with a 5.5 percent increase. Last year, the median Kauai single family home price was $675, 000 highest in the state except for Maui,” Laney said. “However, year-to-date in 2007, prices are off about 3 percent and sales down 4 percent. That's less than a lot of areas in Hawaii, but is actually welcome because affordability is a serious issue on Kauai.”

“Once a cooling starts, it usually doesn't reverse in just one year, though there usually aren't sharp declines, just a plateau. Kauai's example over the last cycle is instructive. An earlier run-up for Kauai home prices came to an end in the early 1990s. From 1990 through 1997, there was a decline of 11.6 percent in single-family home prices. Then the present run-up started - a staggering 205 percent rise from 1997 to 2006.”

People “unlucky” enough to buy a median-priced home when the last downturn began in 1990 Kauai's 1990 median “might have kicked themselves for the next few years as the value of their homes declined. But had they held on to that home until 2006, they would have seen a 170 percent appreciation - a hefty annual gain of 10.6 percent,” Laney said.

Kauai County job creation remains strong in 2007
“Job growth in Kauai County has remained remarkably strong in 2007, considering the scarcity of workers to fill jobs and slowdowns elsewhere in the state. Incoming construction workers have pushed Kauai construction jobs up over 10 percent so far in 2007,” he said.

Kauai retail market faces big-box store controversy
“Kauai retailing isn't without its controversy'” Laney said. “In May, the County Council unanimously passed an ordinance proposed by the mayor to ban any retail or wholesale establishment bigger than 75,000 square feet. Existing big-box stores, like Costco, are grandfathered. Wal-Mart, which wants to expand, has challenged the ban.

“Never has there been a bigger split between consumers, who may benefit from the stores, and some smaller retail outlets that such stores hurt. The irony is that something that promises to reduce Kauai's high cost of living is disallowed.”

Pacific Missile Range is strong economic force
The Pacific Missile Range Facility's 850 people make it one of the island's bigger employers, Laney said. “Only 70 of these are active duty military, and only 130 others are government civilians. Most are local hires, long-term employees who remain even when the major contractors change. Range employment is especially important because many of the jobs there are higher income, scarce on Kauai” he added. “The Kauai tech sector would be virtually non-existent without the Missile Range.”

Kauai's sugar plantation looks to ethanol in its future
“Kauai's remaining sugar operation, the 118-year-old Gay & Robinson, intends to transform itself into an alternative energy provider, leaving the commodity raw sugar business behind. Partnering with Pacific West Energy, G&R plans to develop the nation's first fuel ethanol plant generating renewable power from sugarcane,” Laney said.

The plant is intended to produce up to 12 million gallons of ethanol annually, almost one-third of the state's ethanol needs. Plans are to break ground in early 2008.

“Sugarcane is superior to other ethanol sources such as corn. If you have water, you can grow more energy per unit of sunlight than anything else,” Laney said.

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