Why more apartment buildings may not be the answer to Oahu’s rising housing costs

When Lilia Waikiki’s new building begins accommodating residents next month, the opening will be something of an extraordinary for Honolulu: a new high-rise development offering apartments for rent at market rates.

Built by Brookfield Properties, a unit of Canadian giant Brookfield Asset Management, which also owns the Ala Moana Center, the condominium in the heart of Hawaii’s prime tourist area will contain the shared amenities of luxury condominiums that dot near Kakaako.

The difference: 401 units of 28 floors are for rent.

It’s a rarity for Waikiki and Ohio in general. The economics of developing multi-family projects makes it easy to build and sell apartments. But Brookfield is betting big on the rental market on Oahu, investing in the heart of the island’s popular tourist area.

“There hasn’t been a new residential option in Waikiki in a long time,” said Chris Hoy, senior vice president of mixed-use division at Brookfield Properties Development. “We just want to offer a different option.”

And Brookfield doesn’t stop with Lilia. Howe said the company has received approvals to build a second apartment tower at the end of Iowa at the Ala Moana Center.

Hoy said the company plans 581 apartments, 120 of which are for people earning 80% or less of the median income of Honolulu, about $67,680 for a single person and $77,360 for a couple. This is a rare opportunity to rent at affordable prices next to the luxurious Park Lane apartments and a stone’s throw from Ala Moana Beach.

“They’re going to have some very nice neighbors,” Hoy 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 a huge demand for apartments starting around $3,000 per studio? Stuart Werton / Civil Beat / 2022

Brookfield is hardly the only developer of rental buildings at market rate. For example, developers Kain Pia and John Wallenstrom, co-founders of Alakai Development, helped develop the 500-unit Kapolei Lofts. Pea and Wallenstrom have also developed a 318-unit community called The Element in Ewa Beach.

But such projects are rare. Often, developers build apartments. This means queuing up buyers early, collecting deposits and, upon completion of the project, handing over the units to the buyers, who essentially reimburse the cost of building the project and incur the maintenance expenses through the condo assembly fee.

For developers, apartments are considered more risky and more expensive. The developers say that the costs of planning, design and construction are not only high. There are also maintenance costs, which are covered by the owner, not the homeowner’s association. Often the key factor, Wallenstrom said, is private financing.

Developers who build affordable rental housing can often get some help from the government. For projects that allocate a large portion of apartments to people who earn between 50% and 60% of the median income in the area, there are housing tax credits for low-income people, which basically serve as equity — part of the money as the down payment needed to get Mortgage loan. In addition, Honolulu recently adopted an ordinance that makes it easy to redevelop small buildings into affordable rentals with more units than previously permitted by zoning ordinances.

“What people don’t understand is that mom and pop investors have been supporting the rental market for years.” – Developer Kristen Camp

Steve Kelly, president of Kapolei Properties at James Campbell Co., said: , Kapolei Lofts are eligible for general state tax relief by allocating 300 of their 500 units at below-market rates. Kelly said: – Income tax credits.

“It’s really these incentives that allow projects to be built,” he said. “You’d be hard-pressed to get these projects off the ground without those incentives.”

Another issue is the cost of capital. Wallenstrom said developers generally need stock investors, and stock investors want a return on their investment. When competing for such capital, he said, Hawaii could be at a disadvantage.

He said Hawaii’s time-consuming regulatory approval processes are raising capital costs. Another factor, Wallenstrom said, is that Honolulu and Hawaii in general are losing population, which could raise questions about investing here.

“If you are an honest person and just look at it intellectually, you can understand why people want to invest their money elsewhere,” he said, referring to booming markets like Salt Lake City, Utah.

Kristen Camp, a Honolulu developer, saw some of these dynamics when she tried 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 units for sale. Anita Hofschneider / Civil Pet / 2018

Camp, CEO of the Avalon Group, said maintenance, development and financing costs were so high that the property had to charge market rate tenants up to $3,800 a month to support reasonable rents, cover debt and maintenance.

Camp said it simply turned out that there was little appetite for rental apartments on the order of $4,000 a month on Hawaii Kai.

“If you pay $3,800,” she said, “that’s a mortgage.” People will buy an apartment as well.

In the end, just two years after opening, Avalon converted 7,000 market-rate apartments on Hawaii Kai into condominiums and sold them.

Camp said the project still includes 55 affordable rental apartments. Of the remaining units, a little over half is occupied by the owner and the rest is owned by investors who rent out properties.

Little mom and pop investors fill a niche

Camp said these small real estate investors play an important role in the Honolulu market. She said their pervasive presence in the market is another factor that could discourage large institutional investors.

Camp, Wallenstrom and other experts said this is because these angel investors usually accept smaller short-term returns than institutional investors, who want large cash flows right away. Camp said many individual investors just want enough rent to cover their mortgage and maintenance fees. The expected return comes later when the owner sells the property.

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

This is often overlooked by housing advocates who criticize investors for buying condominiums, Camp said.

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

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

Kelly said James Campbell is looking into another project in Kabul, though it’s too early to share details. And there’s the Brookfield Corporation, which is making its big investment in Waikiki.

Hoy declined to reveal how much the company is spending on building Lilia, but said the project could spend $10 million to $15 million just to cover things like architectural and engineering plans, traffic studies and other work needed just to get various government approvals for the building. .

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

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

Brookfield also sells convenience. He noted that tenants looking for a place to live would be able to deal with a single company managing multiple units rather than dealing with multiple mom-and-pop landlords. He also said, for those who rent, a Brookfield representative will be on site to deal with problems. Finally, he said, there is a ground floor tenant, a longtime Waikiki Grocery Food Pantry.

Hoy said the grocer provides more than convenience; It also helps the project to operate financially.

“Without this retail element, this would be a lot different,” he said.

If Lilia hadn’t done a pencil, Brookfield wouldn’t be able to take 7000 Hawaii Kai and transform into condos. That’s because the property owner is Queen Emma Land, the real estate arm of Queen’s Health System, which was founded by Queen Emma and King Kamehameha IV. Howe said Brookfield is renting the land from Queen Emma, ​​and under the lease, Brookfield cannot convert apartments into condominiums.

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

This includes reasonable prices. Located in a group of low-rise buildings across the street from Lilia Tower, 53 units known as the Kanekapolei Collection have been rented, said Hoy.

At a cost of about $1,400 per month for a one-bedroom or $1,850 for a one-bedroom, it’s for households earning no more than 80% of the median income in the area, which for one person means no more than 67,680. $77,360 USD. two.

When the Ala Moana apartment project is complete, Brookfield, which manages $690 billion in assets globally, will have 1,035 apartments for rent in Honolulu, including 211 for below-average families.

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

However, while less expensive rentals are clearly needed, the question for Brookfield is whether there are hundreds of people who want expensive rentals in Waikiki and Kakaako.

“The answer, obviously, we hope so,” Howe said.

Struggling to get itPart of our about series.Hawaii’s Changing Economywhich is supported by a grant from Hawaii Community Foundation As part of the CHANGE Framework project.

Leave a Reply