Hawaii
In the Aloha State, Real Estate Gets More Complicated
By Carole VanSickle Ellis
Hawaii is a state that stands alone, literally. Of all the states in the United States, Hawaii is the only one located outside of North America, the only archipelago, and the only state in the tropics.
It is comprised of 127 volcanic islands, eight of which are considered the “main islands”: Niʻihau, Kauaʻi, Oʻahu, Molokaʻi, Lānaʻi, Kahoʻolawe, Maui, and Hawaiʻi (“Big Island”). The state is known for its incredible beauty and, when it comes to real estate, for the incredibly high costs of living and home values that come as a result of extremely limited and beautiful livable acreage.
Even prior to the horrific Maui County wildfires (see sidebar) that decimated more than 2,500 acres on Maui island (this accounts for much of the residential area on the island since more than half of the island is a conservation district and about 35% is agricultural land), the housing situation on all the islands was growing increasingly alarming.
“Let me break it down for you. We don’t have enough houses for our people. If it’s not a crisis, if it’s not an emergency, I don’t know what is,” Hawaii governor Josh Green said in July of this year when he signed an emergency declaration on housing suspending six state and county laws governing land use, historic preservation, and environmental review.
Supporters hoped the declaration would result in the construction of 50,000 new homes in the next three years, while critics warned overriding historic preservation provisions, land-use regulations, and environmental review could have dramatic and negative impact on all of the inhabited islands.
For developers, the declaration represented a limited window of opportunity opened by a governor desperate to stop outbound migration to the mainland of residents who simply can no longer afford to live in the state. Fewer than one-third of households currently living in Hawaii can afford to buy a single-family home, and less than half can afford to buy a condo, according to the University of Hawaii Economic Research Organization Fund. Median rental prices are also unaffordable to at least one-third of Hawaiian households.
Green’s declaration altered Oahu’s zoning laws to permit the conversion of downtown office space to rentals and created a fast track for the development of affordable housing by removing land-use restrictions. It also itemized 34,000 units in the Honolulu city and county areas alone and spotlighted the “Top 10 Projects in the Pipeline” on the Big Island that could create approximately 4,000 housing units over the next decade. On Hawaiʻi, only two of those projects are currently under construction, but all project “100% affordable units” upon completion.
Countering a Confusing Trend of Expensive “Stagnation”
Although Hawaii tends to top the list when it comes to the most expensive places to live in the United States, the state’s housing market has been in a state of prolonged stagnation according to many analysts. So much of the local population has been priced out of the market that investment properties — even rentals — tend to perform better when they cater to out-of-town residents.
Accessory dwelling units (ADUs) have been increasing in popularity recently because it enables current property owners to increase their passive income without acquiring more land.
“This strategy is likely my favorite,” observed Koa Cassady, realtor associate for Dwell Hawaii/Ho’opili Living, “and it is arguably the most efficient option…because you already own the land, which we all know is the most expensive part of Hawaii real estate.”
In fact, Cassady said, the land upon which a structure sits accounts for between 70 and 80% of a home’s total value in most cases in Hawaii. He noted, however, that ADUs in Hawaii do “come with their own set of unique challenges and regulations.”
Naturally, the axiom “location, location, location” is truest when dealing with a chain of islands. This can also complicate matters for investors who do not live in the area who wish to purchase investment property. When looking at the median state numbers is not enough, breaking down median income by island or even neighborhood can help investors get a better picture. For example, Waikīkī, a neighborhood on the south shore of Honolulu, lost value over the course of 2022. However, median household incomes in that area are rising (by just over 4.5%) year-over-year, and neighboring Honolulu proper posted a 6.2% increase in median household income over the course of the same time period. This could indicate that Waikīkī is poised for additional growth as urban residents leverage their earnings to move outward.
Investors should also remember that trends tend to be outsized in Hawaii due to the extremely limited nature of real estate in the Aloha State. While sales volumes are declining throughout the country as interest rates rise and homeowners decide to stick with their pandemic-era low rates rather than move, in Hawaii, the numbers are particularly stark. According to the Honolulu Board of Realtors, sales on Oʻahu declined 12% month-over-month in April 2023 and year-over-year by 43%. During the same time period, the Big Island of Hawaii posted a 34% decline in home sales year-over-year, and Kaui’s closed sales fell by more than 63%. Of course, the Maui wildfires have dramatically affected the real estate climate on that island and throughout the entire state; it remains to be seen how the local government will deal with the disaster and how that will affect the island of Maui and state as a whole.
SIDEBAR
Maui & the “Vulture Investor” Conundrum
As horrifying wildfires tore through the island of Maui last month leaving death and devastation in their wake, the world was confronted with uniquely confounding images of tourists snorkeling on their Hawaiian vacations in the same waters where locals had recently swum for their lives from the maelstrom.
Now that the fires have been largely contained and extinguished, hundreds of people are still missing from Maui and many are feared dead.
As the residents of the island struggle to visualize what “rebuilding” will mean in their ravaged neighborhoods, they report calls from “predatory” investors and “scammers” seeking to acquire what remains incredibly valuable real estate. As always, real estate investors find themselves treading a fine line even as they serve the vital purpose of revitalization in a devastated economy. In Hawaii, any real estate investor seeking to acquire property right now must treat the process with particular care.
According to the Pacific Disaster Center (PDC) and the Federal Emergency Management Agency (FEMA), more than 2,200 structures on Maui, most of which were residential, were destroyed in the wildfires. Rebuilding communities and infrastructure could cost upward of $5 billion, and nearly 5,000 residents will require emergency shelter throughout the process.
As is always the case in the wake of a destructive natural disaster, there will be some homeowners who elect to leave rather than fight it out with the elements and bureaucracy over the course of years. These individuals are likely to be the most interested in entertaining offers from investors, but Hawaiian governor Josh Green announced in mid-August he would do everything in his power to prohibit the purchase of Maui land by anyone from outside the state of Hawaii.
“Laws, federal and otherwise…don’t [usually] let us restrict who can buy in our state,” Green explained, adding, “but we can do it deliberately during a crisis, and that’s what we’re doing.” He added that he is working with Hawaii’s state attorney general’s office to “explore our options to do a moratorium on any sales of properties that have been damaged or destroyed.”
At present, there has not been any public commentary or analysis on how this might affect homeowners seeking to exit the island and unable to solicit or accept offers on their own land.
Local media outlets have chimed in with Green’s narrative, classifying investors reaching out to make offers on destroyed properties in the same category as looters and thieves. Housing advocates in the area say the local housing crunch, already an issue before the destruction, is “looming larger” every day.
Tamara Paltin, a Maui County council representative, summed up local fears when she said, “If all those people from the outside with a lot of resources come in and rebuild Lāhainā the way they want it to be, it won’t be Lāhainā anymore.” At present, the sentiment against real estate investors is running high, and no matter how high the integrity, it is likely all offers will be tarred with the same brush.
“I’m so frustrated with investors and realtors calling the families who lost their home, offering to buy the land,” explained conservation activist Tiare Lawrence. She continued, “How dare you do that to our community right now?”
The governor’s office is also encouraging all homeowners to report unsolicited offers to buy their properties to the state’s Department of Commerce and Consumer Affairs (DCCA)’s Office of Consumer Protection and the Regulated Industries Complaints Office (RICO).
