Skip to main content

Affordable Housing Shortage in Hawaii is a CRE Development Opportunity

Hawaii's changing multifamily housing landscape is creating opportunities for development and unique due diligence needs.

Hawaii is in the throes of a bona fide affordable housing crisis. Not only is there a shortfall of available housing, especially for renters, but the average wage in the state is less than half of affordable “fair market” rent prices. This means that actual “affordable” housing isn’t really affordable for middle class and low-income families, let alone Hawaii’s growing homeless population. Estimates indicate that the state needs at least 6,500 units annually to end the shortage within the next decade – that is a lot of potential development opportunity!

So why hasn’t this decades-long crisis translated directly to construction and development solutions? Historically, Hawaii has not been an easy place for developers to build and find long-term success. Everything on the island is expensive, due to shipping costs and a 4 to 4.712% general excise tax added on top of sales tax, so there is a lower cost margin for building to begin with. Hawaii has some of the most complex and restrictive land use laws in the country, compounded by regulation at the local, state and national levels. Lastly, the island’s remoteness presents unique structural and environmental issues that impact construction.

Changing State Regulations Creating Opportunity

The stringent affordable multifamily housing landscape is changing, however. For one, there is a surge in demand and an official recognition by state lawmakers of the dire necessity to meet demand metrics. For another, Hawaii is finally providing monetary incentives for builders and developers to encourage focus on affordable housing. Honolulu, one of the tightest and most expensive housing markets in the country, is waiving infrastructure permits and providing land lease incentives for developers.

Hawaii’s commitment to solving their affordable housing crisis presents a tremendous commercial real estate growth opportunity in a luxurious, exotic setting. Taking full advantage of this current housing demand will mean understanding the intricacies and challenges of the Hawaiian construction landscape, as well as engaging with due diligence and environmental consulting professionals to help navigate them.

Hawaii Has Unique Development Considerations

Most of the land left for development of new properties (especially in remote islands) is virgin countryside. It is often lacking in basic infrastructure and civil urban engineering. Building housing developments requires adding on external capacity for utilities, including electricity, water and sewage treatment. Many areas have old sewer lines that must be replaced and remote areas still use septic tanks. There can be unexpected delays waiting for utility companies, who are often short staffed. This causes losses in time and money as developments stall.

Developers and lenders can also expect to come across cultural obstacles, local laws and state regulations. For example, there are tight regulations and National Environmental Policy Act protections over what land can be used and how, particularly when dealing with loans involving homestead land designated for native Hawaiian people and their descendants. Condominium property regimes in Hawaii involve different zoning and building permits that developers should be aware of. The ancient Hawaiian practice of preserving and laying to rest the earthly remains of ancestors (Iwi Na Kupuna) throughout the island landscape means that there are ancient bones scattered everywhere. Enforcement of these cultural traditions is overseen by the State Department of Land and Natural Resources, Historic Preservation Division, which requires stopping activity immediately at a site where remains are discovered until the site is in accordance with Hawaiian burial laws.

To optimize the benefits of Hawaii’s multifamily affordable housing building opportunities, lenders and developers will need meticulous due diligence advising to help answer questions and address island-specific issues. Many of these issues are things developers who don’t have extensive experience building in Hawaii wouldn’t even think to ask about.

Due Diligence Is Critical

Basic due diligence will include a Property Condition Assessment (if an existing structure is being converted) and a Phase I Environmental Site Assessment for potential or existing site contamination issues. Careful zoning and surveying can identify restricted land use and complex property line clarifications, particularly for native heritage and protected sites. Environmental impact and noise pollution statements can elucidate adherence to strict regulations unique to Hawaii.

Finally, Construction Risk Management can address construction budgets, schedules, sources of potential delays, subcontractor evaluations and civil engineering needs for adapting previously undeveloped sites.

It’s critical to choose a due diligence professional who can offer a complete understanding of Hawaii’s real estate dynamic and has a local presence in this blended community. Being unaware of the unique nuances in Hawaii can cause significant barriers in closing a deal and a potential loss of a very lucrative investment opportunity.