Developers scrap plans for a 150-room hotel in Kapolei and a 55,000-square-foot retail center in West Oahu.
Bids for a project to air-condition the state’s classrooms come in far higher than expected, prompting the state to reject the proposals and start over. A state legislator says some badly needed public housing repairs must wait.
The bogeyman blamed for all of these setbacks? Honolulu’s high construction costs.
Sometime around the beginning of 2015, Honolulu surpassed New York City to become the most expensive city in the United States in which to build things. San Francisco, Boston, Chicago and Los Angeles weren’t even close, according to an analysis by global property consultant Rider Levett Bucknall.
Many things are expensive in Honolulu, from food to utilities. Still, sky-high construction costs present some mysteries.
Wages for construction workers have increased, but not enough to account for the overall hike in costs. The same goes for materials. Fuel costs are unusually low and taxes – which did go up for a time in response to the recession – are no higher.
So how to explain it?
Those in the business say it’s all about the potential risk of not having enough qualified workers to do the job. The construction labor pool is stretched thin. In the past year, construction jobs in Honolulu have increased by 16 percent, tied for the fifth-highest jump among U.S. metro areas, according to the Associated General Contractors of America.
Contractors say that some of those workers are less productive, meaning a job might take longer or require more fixes. It might be hard just to find the requisite subcontractors to get the job done.
During the lean years, experts say, contractors bid for jobs promising little or no profit just to keep people working. Now they are making sure that their costs are covered — and then some. In other words, they’re making healthy profits.
Some may see this as gouging. But in a business very sensitive to the ups and downs of the business cycle, contractors see it as a case of making hay while the sun shines.
“I don’t think anyone is doing it maliciously or greedily,” said Dan Jordan, co-owner of Honolulu Builders.
And when it comes to public works projects, like Honolulu’s $8.3 billion rail project, cost overruns may have as much to do with faulty initial estimates as with the escalating costs of construction. With the rail project, some said that overruns were bound to happen when costs were being projected before a design was even in place.
“Construction costs played a role, but bad estimates also played a role,” said Carl Bonham, executive director and professor of economics at UHERO, the economic research organization at the University of Hawaii.
Just How High Are Honolulu’s Building Costs?
A number of indices gauge Honolulu’s high construction costs.
The Hawaii Department of Business, Economic Development and Tourism continues to calculate a cost index first developed by First Hawaiian Bank. It looks at two construction scenarios — a single-family house and a high-rise building.
Both indices have shown healthy growth in recent years. Costs for the single-family residence shot up 6.7 percent in 2014. The one for the high-rise increased 6.8 percent the same year.
But these kinds of increases are not out of line with what’s occurred in the recent past in Honolulu. The cost of building a single-family house went up almost 10 percent in 2006, while the expense of a high-rise increased by 9.2 percent that year.
This index only takes into account “inputs” – the cost of labor and materials, for instance – as opposed to overhead and profits. It can be particularly unreliable in volatile conditions such as a construction boom, UHERO’s Bonham said.
Rider Levett Bucknall, by contrast, takes into account overhead and profits in its analysis of construction costs in 12 cities. That’s the one that shows Honolulu surpassing New York City in early 2015.
As of the second quarter of 2016, Honolulu’s costs were particularly high for office buildings, strip shopping malls, hotels, hospitals, warehouses, basement parking and high schools. In the category of single-family housing, Honolulu left the other 11 cities in the dust.
Only in the categories of shopping centers, street-level parking, multi-family housing and elementary schools did other cities rival or sometimes edge out Honolulu.
The one glint of good news in RLB’s second-quarter report was that cost increases seemed to be leveling off here compared to what’s happening in other cities. Los Angeles costs jumped 2.4 percent. San Francisco shot up 4.9 percent. But Honolulu costs went up by a mere 0.9 percent.
Indeed, the state’s data seems to be hinting at a similar slowdown, with a first-quarter increase for a high-rise building and a single-family house at 1.8 percent and 2.2 respectively, compared to 7.5 percent for both types of construction during the same period a year before.
Wages Up, But Not For All
Wages are clearly not the sole culprit for Honolulu’s high construction costs.
Overall, construction wages from 2009 to 2015 went up by 9.2 percent, according to data from the U.S. Bureau of Labor Statistics. But construction wages for the state as whole rose more — 12.5 percent. And the nation saw an increase of 15.6 percent.
In Honolulu, the construction wage data mask wide disparities among wages for different types of building. Wages exploded by 75 percent for industrial building construction, according to BLS data. Other sectors that did well included residential glass contracting, residential flooring construction and land subdivision.
Many sectors did not do nearly as well. Some even saw their wages slip, including framers, house painters and masonry contractors.
Wages may not tell the whole story for labor costs, though. As the construction labor market has tightened, some contractors have looked to the mainland for skilled workers.
Jordan of Honolulu Builders said he just brought in 22 workers from the mainland. Another contractor flew in 30 or so from Las Vegas.
But it’s not like California workers driving their pick-up trucks a few hundred miles when there’s a building boom in Phoenix.
Honolulu contractors must provide housing as well as transportation to the worksite. And the workers may want to go home every month or so.
The other hidden cost of a stretched labor force is reduced productivity, according to Jordan and others. Contractors may hire B-list workers they never would have considered in leaner times.
“We have a finite amount of skilled construction workers in Hawaii,” said Tony Smith, RLB’s executive vice president, North America.
During the recession, experienced supervisors “kind of went fishing,” he said, and when the economy bounced back, “found they liked fishing better.”
In this environment, many contractors are choosing to negotiate prices with developers they know well rather than submit take-it-or-leave-it bids that they fear may leave them holding the bag for unexpected costs, said RLB’s Smith.
“Contractors will remove some risk from their bids because they can,” he said.
Some also may be shying away from government contracting for the time being. Contractors feel that public entities may force them to bear the burden for variables beyond their control, Jordan said, such as relocating utilities whose exact location is uncertain.
Government agencies that have had to jettison projects may find one upside to the skyrocketing costs of building things: Some of that money eventually finds its way back into state coffers in the form of general excise taxes paid by businesses and income tax paid by individuals.
For the fiscal year that just ended, revenues were up by 8 percent, and some of that can be attributed to higher construction costs. RLB estimated that the general excise tax base from contracting will increase by 7.4 percent in 2017, on top of a 12.1 percent expansion in 2016 and 9.4 percent in 2015.
Unfortunately for Honolulu’s rail project and other strapped public works, the extra cash is not enough to cover the shortfalls.
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