New Multifamily Developments are on the Horizon

Multifamily development in the State of Hawaii and specifically on the Island of Oahu is primarily focused on for-sale condominium development. This has limited new developments of rental projects, leading to a critical shortage of affordable housing. In response, county governments implemented workforce housing requirements on new developments. The limited supply of rental housing is reflected in the region’s low vacancy rates, creating upward pressure on rental rates. Perhaps the primary reason for the limited supply and resulting high rental rates in Hawaii, and on the Island of Oahu in particular, are the significant barriers to entry. The primary barriers are the high cost of land and the infeasibility of developers to put together rental residential projects without public subsidy. Secondly, building regulations and urban boundary limits aimed at reducing sprawl have constrained the amount of land that can be developed with residential uses. Additionally, a stringent and often lengthy entitlement process adds time and risk to projects, further reducing their financial feasibility.

The conversion of military housing to private use over the past decade resulted in an increase in private sector apartment units for Honolulu County. However, this was a transfer from the public to the private sector, rather than an actual increase in inventory. The commercial success of this process is reflected in the 2012 sale of Iroquois Point, an oceanfront 1,450-unit multifamily development in Ewa Beach. The property is situated on 367 acres owned by the U.S. Navy, adjacent to the westernmost entrance to Pearl Harbor. The leasehold interest was purchased in 2012 for about $300 million by Carmel Partners.
The most notable new multifamily development in Hawaii is the proposed public-private development of the state’s tallest building in Honolulu. This development was put in motion at the end of 2012 with the Hawaii Community Development Authority’s unanimous vote to select Forest City Hawaii to develop the $500-million 690 Pohukaina mixed-use project. This project will include 800 affordable rental housing units. Forest City Hawaii’s plan was reportedly selected because it presented less of a financial risk to the state by keeping the units as workforce rentals instead of selling them as condominiums.
The 650-foot tower will be built on state land in the Kakaako district under a 65-year ground lease. Because the current height limit in Honolulu is 400 feet, the plan is now in an 18-month approval process. Work on an environmental assessment has already begun, while a rigorous rule-adoption process will be undertaken soon with plans to increase the project’s density.
While investors have expressed concerns about the current multifamily construction boom witnessed across the nation, the barriers to entry in Hawaii should protect this market from overbuilding its rental housing.
New supply of for-rent product will be limited to developments involving public-private partnerships, such as Forest City’s proposed tower in Honolulu. The multifamily investment market continues to exhibit significant yield compression, with demand from local and national investors competing for the very limited number of offerings.
— John C. Vaughn, senior director of valuation and advisory for Cushman & Wakefield in Honolulu
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