Why More Apartment Buildings May Not Be the Answer to Oahu’s High Housing Costs

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When the new Lilia Waikiki apartment building begins welcoming residents next month, the opening will mark something unusual for Honolulu: a new high-rise development offering apartments for rent at market rates.

Built by Brookfield Properties, a unit of Canadian the giant Brookfield Asset Managementwhich also owns Ala Moana Center, the apartment building in the heart of Hawaii’s main tourist district will feature amenities common to luxury condominiums sprouting nearby in Kakaako.

The difference: the 401 units of the 28-storey building are for rent.

This is a rarity, for Waikiki and Oahu in general. The economy of developing multi-family projects makes it easier to build and sell condos. But Brookfield is making a big bet on Oahu’s rental market, investing in the heart of the island’s iconic tourist district.

“There hasn’t been a new housing option in Waikiki for a long time,” said Kris Hui, senior vice president of the mixed-use division of Brookfield Properties Development. “We just want to offer a different option.”

And Brookfield doesn’t stop with Lilia. The company has secured approvals for a second apartment tower at the Ewa end of the Ala Moana Center, Hui said.

The company plans 581 apartments, including 120 for people earning 80% or less of Honolulu’s median income, Hui said, or about $67,680 for a single person and $77,360 for a couple. This is a rare opportunity for affordable rentals next to chic park alley condos and a stone’s throw from Ala Moana beach.

“They will have very good neighbors,” Hui said.

Lilia Waikiki
Lilia Waikiki, a new luxury apartment building in the heart of Waikiki, is a rare addition to Honolulu’s housing mix. But is there much demand for apartments starting at nearly $3,000 for a studio? Stewart Yerton/Civil Beat/2022

Brookfield isn’t the only developer building market-rate rentals. Developers Cayenne Pea and Jon Wallenstrom, co-founders of Alakai Development, for example, helped develop the 500-unit Kapolei Lofts. Pea and Wallenstrom also developed a 318-unit community called The Element at Ewa Beach.

But such projects are rare. More often, developers build condos. This means lining up buyers in advance, collecting deposits, and when the project is complete, handing over the units to buyers, who essentially reimburse the construction cost of the project and pay maintenance expenses through association fees. co-owners.

For developers, apartments are riskier and more expensive. It’s not just that planning, design and construction costs are high, developers say. There are also maintenance costs, which are covered by the owner and not by a homeowners association. But the kicker, Wallenstrom said, is often private funding.

Developers who build affordable rental housing can often get help from the government. For projects that reserve a large proportion of apartments for people earning 50-60% of the region’s median income, there are low-income housing tax credits, which essentially serve as equity – a sum of money like a down payment required for a mortgage. Additionally, Honolulu recently passed an ordinance making it easier to redevelop small walk-up buildings into affordable rentals with more units than previously allowed by zoning laws.

“What people don’t understand is that it’s mom and pop investors who have been subsidizing the rental market for years.” — Developer Christine Camp

Kapolei Lofts qualified for a general state excise tax exemption by setting aside 300 of its 500 units at below-market rates, said Steve Kelly, president of James Campbell’s Kapolei Properties division. Co. Although different from the equity provided by low-income tax credits, the exemption helps, Kelly says.

“It’s really those incentives that allow projects to get built,” he said. “You would have a hard time doing these projects without these incentives.”

Another issue is the cost of capital. Developers generally need equity investors, and equity investors want a return on their investment, Wallenstrom said. And when competing for such capital, Hawaii may be at a disadvantage, he said.

Hawaii’s time-consuming regulatory approval processes drive up capital costs, he said. Another factor is that Honolulu and Hawaii in general are losing population, which may raise questions about investment here, Wallenstrom said.

“If you’re an unbiased person and you look at it intellectually, you can understand why people might want to invest their money elsewhere,” he said, pointing to booming markets like Salt Lake City, Utah.

Honolulu developer Christine Camp saw some of this momentum when she attempted to develop and operate 7000 Hawaii Kai Drive, a 269-unit complex with 55 affordable units and 214 market-priced apartments.

More than 200 units at 7000 Hawaii Kai Drive will be converted from rentals to sales units. Anita Hofschneider/Civil Beat/2018

Maintenance, development and financing costs were so high that the property had to charge tenants up to $3,800 per month at market prices to subsidize affordable rents and cover debt and maintenance, said Camp, CEO of Avalon Group.

It turned out there just wasn’t a big appetite for apartments to rent for nearly $4,000 a month in Hawaii Kai, Camp said.

“If you’re paying $3,800, that’s a mortgage,” she said. People might as well buy a condo.

Ultimately, just two years after opening, Avalon converted 7,000 Hawaii Kai market priced apartments into condos and sold them.

The project still has 55 affordable rentals, Camp said. Of the remaining units, just over half are owner-occupied and the rest are owned by investors who lease the properties.

Small mom and pop investors fill a niche

These smaller real estate investors play an important role in the Honolulu market, Camp said. And their ubiquitous presence in the market is another factor that can deter large institutional investors, she said.

The reason, according to Camp, Wallenstrom and other experts, is that these investor-owners will generally accept lower short-term returns than institutional investors, who want substantial cash flow immediately. Many individual investors simply want enough rent to cover their mortgages and maintenance costs, Camp said. The expected gain comes later when the owner sells the property.

“Basically they are looking for capital preservation whereas an institutional investor is looking for an immediate return on their capital,” she said.

Camp said housing advocates who criticize investors for buying condominiums often ignore him.

“All these people fighting to make sure investors don’t buy condos are shooting themselves in the foot,” she said. “What people don’t understand is that it’s mom and pop investors who have been subsidizing the rental market for years.”

Despite these challenges, developers are still building apartments, but not as fast as condos.

James Campbell is considering another project in Kapolei, Kelly said, although it’s too early to share details. And there’s Brookfield, which is making its big investment in Waikiki.

Hui declined to say how much the company is spending to build Lilia, but said a project could spend $10-15 million just to cover things like architectural and engineering plans, traffic and other works needed just to get various government approvals to build. .

Like other market-priced apartments, Lilia won’t come cheap: a 431-square-foot studio will start at around $2,875 per month, while the most expensive, 1,994-square-foot, three-bedroom, three-bedroom penthouse apartment bathrooms, will go for $11,400 per month.

The building’s location near the beach in the heart of Waikiki is a major selling point, Hui said.

Brookfield also sells convenience. Tenants looking for accommodation will be able to deal with a single company managing multiple units instead of dealing with multiple family landlords, he noted. Additionally, for those who rent, a Brookfield representative will be on hand to sort out any issues, he said. Finally, he says, there’s a tenant downstairs, longtime Waikiki grocer, Food Pantry.

The grocer offers more than convenience, Hui said; it also helps the project run financially.

“Without that retail component, it would be very different,” he said.

If Lilia doesn’t make it, Brookfield can’t go the way of 7000 Hawaii Kai and convert to condos. This is because the owner of the property is Queen Emma Land Co., the real estate arm of The Queen’s Health System, founded by Queen Emma and King Kamehameha IV. Brookfield leases the land from Queen Emma, ​​and under her lease Brookfield cannot convert the apartments to condos, Hui said.

But, Hui added, “Even without a land lease, we’re here to build rentals.”

And that includes those that are affordable. Located in a cluster of low-rise buildings across from the Lilia Tower, the 53 units, known as the Kanekapolei Collection, have all been rented out, Hui said.

Costing around $1,400 a month for one bedroom or $1,850 for a two-bedroom, they are intended for households earning no more than 80% of the median income of the areawhich for one person is no more than $67,680 and $77,360 for two.

When the Ala Moana apartment project is completed, Brookfield, which manages $690 billion in assets worldwidewill have 1,035 apartments for rent in Honolulu, including 211 for households earning less than the median.

Hui, a veteran developer whose previous projects include Pacifica and Symphony at Ala Moana, said the company is committed to providing low-cost rentals. Lilia’s affordable rentals will stay that way for 30 years, he said, while units in the Ala Moana Tower will rent below market rate for 45 years.

Still, while there is clearly a need for cheaper rentals, the question for Brookfield is whether there are hundreds of people who want expensive rentals in Waikiki and Kakaako.

“The answer,” Hui said, “obviously is that we hope so.”

Struggling to get by» is part of our series on «Hawaii’s Changing Economywhich is supported by a grant from the Hawaii Community Foundation as part of its CHANGE Framework project.

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