When developer Serge Krivatsy thinks about where to build his next housing project in Honolulu, he doesn’t look to Moiliili.

That’s not a knock on the urban neighborhood, which is right by the University of Hawaii and only a short bus ride from downtown Honolulu.

Lots there are generally zoned urban too, which means Krivatsy wouldn’t have to plow through the long process needed to rezone land.

But Krivatsy considers the neighborhood completely off the table  — because it doesn’t have enough sewer capacity.

It’s not just Moiliili — the lack of upgrades to the wastewater system is one reason why developers have built relatively little housing throughout Honolulu to meet a growing demand.

A 2014 state study found that more than 20,000 rental units are needed in the state by 2020, with more than half needed by families who earn less than 60 percent of area median income, or $57,480 for a family of four.

The housing shortage, in conjunction with seemingly limitless demand, has caused home prices to skyrocket and forced many residents to double up or move away. Hawaii now has the highest rate of homelessness per capita of any state, prompting policymakers to scramble for solutions.

But solving the housing crisis is not going to be easy or cheap, in part, say development experts, because of city officials’ longtime neglect of Honolulu’s basic infrastructure, particularly sewers.

“The cost of building new or upsizing existing infrastructure is the single biggest impediment to building more affordable housing on Oahu,” said Steve Kelly, vice president at real-estate firm James Campbell Co. He noted that infrastructure improvements typically account for 20 percent to 35 percent of the cost of a new home.

The city is in the process of upgrading its sewer system through a multi-billion dollar consent decree, reached in 2010 with the U.S. Environmental Protection Agency after the agency sued the city over a series of illegal sewer overflows. The city so far has budgeted $1 billion of the $5.2 billion project. City officials also are working on ensuring infrastructure is available to support major development projects in certain neighborhoods around planned rail stations.

But sewer upgrades are costly, and development experts say the city needs to be willing to invest more money in infrastructure and allow creative financing strategies if it truly wants to meet the housing demand and revitalize the urban core.

Wastewater limitations already are proving a roadblock to a new law that allows homeowners to build an extra unit on their property. That law is a key part of Mayor Kirk Caldwell’s strategy to increase the supply of low-income rental housing.

The Department of Planning and Permitting said 100,000 homeowners might be eligible to build the accessory units. But, because of sewer capacity issues, the agency’s wastewater branch has rejected one-fourth of the 115 queries it’s reviewed since September asking whether a property is eligible for a rental unit.

Concerns about infrastructure permeated the conversation at a recent housing conference held by the Building Industry Association of Hawaii.

“We have a housing problem for a reason,” said Jon Wallenstrom of Forest City Hawaii, a panelist at the conference. “We aren’t looking at some things proactively. A project can’t take on the type of infrastructure problems that we have. It is a bigger problem than any one project can handle.”

Housing Can’t Happen Without Infrastructure

If anyone knows how Honolulu’s dilapidated wastewater system limits housing development, it’s Cathy Camp, development director at Kamehameha Schools Bishop Estate.

KSBE is the biggest private landowner in the state. Some of its property is in Kalihi, a neighborhood close to downtown that’s along the city’s $6 billion (and counting) planned rail line.

The city has a vision of revitalizing Kalihi that involves adding new apartments on KSBE property along Kapalama Canal. But Camp says it won’t happen if the sewers aren’t improved.

Rail “may make the area more desirable, but it’s not the golden ticket,” Camp said.

“The people weren’t crying, ‘Give us elevated rail!” she said. “That’s not the cry of the people. They were saying, ‘Give us sewer and then we can build these things.”

The sewer system in the area is so constrained that KSBE has considered building its own wastewater treatment plant to handle growth.

The trust also has been contacted repeatedly over the years by developers interested in revitalizing Puck’s Alley at University Avenue and King Street.

The area is zoned for building up to 150 feet in height, creating the possibility of a 15-story residential or mixed-use project that could provide housing for University of Hawaii students and young professionals.

But it’s a pipe dream until the sewer system is upgraded.

“The cost of infrastructure is so high here that even if you have free land it’s very, very difficult to get projects to be financially feasible,” said Steve Colon, president of the Hawaii branch of Hunt Companies and chair of the Urban Land Institute of Hawaii.

Dean Uchida, a senior project manager at SSFM International, a planning and design firm, says outdated infrastructure has been a problem statewide for decades.

The Hawaii Institute for Public Affairs estimated in 2010 that the state and counties had over $14 billion in urgent infrastructure needs and criticized infrastructure planning as “piecemeal and uncoordinated.”

University of Hawaii economics professor Carl Bonham says statewide infrastructure investment has been flat since the early 1980s, with the exception of the late 1980s. Inadequate investment in infrastructure is a national problem — and a political problem, he said.

“One reason that we haven’t kept infrastructure up, just like the rest of the country, is elected officials aren’t willing to spend when the fiscal situation is tough,” Bonham said. “It’s not really an excuse; you still have to do the right level of spending to maintain and replenish your infrastructure. We don’t do that.”

In Hawaii, the government invested in infrastructure for new developments in the 1960s, but since the late 1970s that expectation has shifted to developers, Uchida said.

During hard economic times, it may have made sense for developers of master-planned projects on open space to build their own sewer, water, drainage and transportation capacity, but the finances don’t work out as well for developers who want to build urban infill projects, Uchida said.

That’s because putting in one residential development in an area with limited sewer capacity may require upgrading pipes or pumps that serve a broader region, which often costs more than one project can handle, he said.

Now that Honolulu wants to contain sprawl and concentrate growth in the urban corridor, an individual developer doesn’t have enough incentive to shoulder the cost of upgrading the sewer lines, Uchida said.

“There’s been a lack of investment in infrastructure across the board,” Uchida said. “We’re in a real catch-up mode now.”

There’s A Lot Riding on Rail

Policymakers have repeatedly said that the construction of Honolulu rail, and the development boom it is expected to bring, offers the best opportunity to build affordable housing to meet Hawaii’s need.

Ensuring there’s adequate infrastructure in neighborhoods along the rail line is key to making that happen.

“The cost of building new or upsizing existing infrastructure is the single biggest impediment to building more affordable housing on Oahu.” — Steve Kelly, vice president at James Campbell Corp.

There’s no total cost estimate of how much the city needs to spend on infrastructure to support development around rail. But the city’s plan for Waipahu, one of 21 neighborhoods around rail stations, estimated that the cost of infrastructure upgrades, including roadways and parks, at nearly $140 million there alone over a 25-year period.

Harrison Rue, who is in charge of managing development around train stations, said a group of city officials meets every week to discuss what infrastructure projects to prioritize.

Much of the city’s sewer upgrades under its consent decree simply ensure that aging pipes aren’t leaking, Rue said. But he’s working with the Department on Environmental Services to see if the timing of some projects needs to be adjusted to accommodate growth.

Right now, Rue and other city officials are working on a master plan for infrastructure improvements for the Iwilei-to-Kapalama area. They expect to complete it within eight months.

But Rue emphasized, “We’re not waiting for the plan to be done to actually do stuff, we’re doing and planning at the same time.”

The goal is to get enough done so that the initial phases of significant housing projects can get off the ground when rail is operational, particularly in Ala Moana and Kalihi, where developers have expressed interest.

As part of the consent decree, the city recently completed projects in Waipahu, Ala Moana and by the airport, all neighborhoods targeted for redevelopment when rail is built.

The city plans to install new sewer trunk lines in Ala Moana and on Waiakamilo Road by 2020 that will increase capacity in both Moiliili and Kalihi. Improvements to the Ala Moana Pump Station are expected to be completed by 2024.

Upgrades at the Sand Island Wastewater Treatment Plant are expected to be finished by mid-2017 and should lessen development restrictions on neighborhoods where projects are being planned, including Ala Moana, downtown and Iwilei.

In Pearl City, large developments have been restricted due to sewer constraints since 2012, but the city is re-evaluating that limitation after completing a recent project.

Rue acknowledged that not all the infrastructure may be adequate before rail comes online.

“There may be some parcels within those areas the developer wants to build on, and because of a particular pipe condition it may be another two years before you get to those areas,” he said. “There’s no city on earth, whether it’s a road or a transit system, that has everything in place at one time.”

Creative Solutions To An Expensive Problem

While the city is making progress toward improving sewer infrastructure, developers are hoping officials will open the door to more creative financing strategies that would make it easier to build housing.

Many developers say the solution is for the government to use long-term bond financing to pay for infrastructure improvements, and make it easier to use certain financing tools. They include tax-increment financing, in which future tax revenue is used to subsidize redevelopment, and community facilities districts, in which a special tax is levied on property owners in a certain area to pay for bonds that cover public improvements.

“We are in one of the lowest interest rate environments and the government is in a good position potentially to float bonds,” said Camp from KSBE. “Given the financial market that we’re in today, we are crazy not to look at what are the alternative funding sources to be able to pay for large capital infrastructure… Other cities are able to be creative on their financing to make it a win-win for all.”

Colon, from the Urban Land Institute of Hawaii, said the organization is considering joining the Pacific Resource Partnership, Land Use Research Foundation and Hawaii Institute for Public Affairs to try to educate legislators on statewide infrastructure problems and potential solutions.

“From what I can tell, I don’t know if we’ll ever be able to meet the (housing) demand,” Colon said. “We need to be employing every tool that’s available in the toolkit.”

Rue said in an email that the city began a series of meetings with developers last week to discuss potential financing tools, including issuing bonds to support private affordable-housing projects and associated infrastructure, and designating a community facilities district in the area stretching from Iwilei to Kapalama, to fund infrastructure upgrades through bonds.

The city included a long list of financing methods it’s considering in its latest draft housing strategy.

But from Uchida’s perspective, the city is still more reactive than proactive, and that mindset needs to change before significant housing development can occur.

“We’re constantly falling farther and farther behind,” he said. “There’s not a concerted effort to say, ‘We need to increase housing across the board.’ We need some strong political will to address the problem and move us in the right direction.”

Uchida said Oahu’s infrastructure wouldn’t be as big a deal if land-use laws didn’t constrict growth on the island.

“It’s when you say we want to refocus growth in the urban corridor – that’s when you have to really invest in infrastructure,” he said. “You need to have infrastructure to support taking out derelict buildings or maybe single-family residences that are dilapidated … You take it from one toilet to 200 toilets, it’s got to flush somewhere.”