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2 January 2004
Raise The Roof
The military's big-bang-like building boom will energize the economy. But will it blow up the Island's housing market?
Later this spring, Hawaii's construction industry will begin one of the country's largest and most complicated remodeling projects. The multibillion dollar effort to reconstruct and refurbish thousands of homes on Oahu's various military bases will not only transform the look and feel of those installations, but it will also alter the state's economic landscape.
On Feb. 1, Actus Lend Lease will take over the management of much of the housing assets of Hickam Air Force Base. In a five-year period, the Napa, Calif.-based developer/contractor/asset manager will be replacing 816 homes and renovating 540 others. Once completed, Actus will be managing the communities and their surrounding assets for the next half-century. The contract is valued at $197 million during the five-year development period and $1.3 billion over 50 years.
In spring of 2005, Actus will likely begin the construction phase of an even bigger project, the Army's Residential Communities Initiative (RCI), which includes the Army and Coast Guard housing assets at Schofield Barracks, Fort Shafter, Tripler Army Medical Center, Wheeler Army Airfield, Aliamanu Military Reservation (including 100 units for the U.S. Marine Corps), Helemano Military Reservation and Kiai Kai Hale.
The massive effort will involve the construction and renovation of approximately 7,700 homes. The project's value over its 10-year development period is $1.7 billion. Over the course of its 50-year term, the contract is valued at $5.1 billion. The Hawaii RCI project is the 17th privatization contract awarded by the Pentagon and the largest to date.
"It's hard to get a handle on the scope and the speed at which we will be working," says Lucien Wong, regional vice president-Hawaii of Actus Lend Lease. "Hawaii Kai was about 10,000 homes that were built over the course of 40 years. We will be building nearly that many in a quarter of the time."
Big Bucks, Big Bang
The University of Hawaii Economic Research Organization estimates that construction spending will soar more than 17 percent in 2004, thanks largely to military privatization projects. Since the Army's RCI construction won't begin until 2005, this would be only the beginning of an upward cycle that will last at least 10 years. With an estimated 85 percent of the work contracted out to local companies, the economic impact will be significant, widespread and, with work continuing through 2014, relatively long-lived.
But will military privatization create a land of milk and honey for everyone? What effect, if any, will this big-banglike creation of nearly 10,000 new homes have on the local real estate market, especially during the 10-year construction phase in which military families are likely to be displaced as their new communities are being built? Will a sudden release of military renters and buyers cause a meltdown in a market that has already gone nuclear? Once construction is complete, will the new communities recapture off-base military families and bring some relief to the market?
Actus official say there is plenty of housing inventory on the various bases to handle the overflow, so they believe that any impact on the real estate market will be temporary and minimal. In addition, if there is a housing surplus, Actus will offer those homes to people in various military categories and Department of Defense (DOD) personnel, not the general public.
"Based on what we know today, there will be enough vacancies both in the privatized area and those under Air Force control, so no one will be forced to move off base," says David Falls, vice president and asset manager for Hickam Air Force Base. "There is a house on Hickam to accommodate every family who needs to move because of construction."
"I don't know whether to be afraid if they build too few homes or too many," says Ricky Cassiday, local real estate market research consultant. "The market is so tight right now that almost anything will affect it profoundly. Someone should be going to the services right now and telling them that they are changing the dynamics of housing, and it could have serious impacts on the local economy."
According to Cassiday, although Hawaii's privatization contract may be one of many being executed by the military, the project, and, more importantly, its economic impact, will likely be unique to the Island. He points out that Honolulu isn't a "one-pony town" nor is it a rural community which many bases with privatized housing are. Land and housing inventory is limited.
Six years ago, Cassiday, then working for Prudential Locations Research, conducted two studies on military housing inventories, which were eventually used to justify to Congress the building of additional housing units and the closing down of others. He says that it is worrisome that a significant replacement of homes is going forward without similar studies, since military personnel are a large segment of Hawaii homebuyers. He estimates that they account for about 10 percent of all Oahu buyers. In Makakilo they make up nearly 50 percent of the residents.
Since Actus will not only be constructing homes, but building cutting-edge, tightly knit communities, the company will likely recapture many off-base residents. Actus officials are planning on increasing the occupancy rates at Schofield and its other projects from 60 percent to 95 percent.
Home Sweet Homes
A drive through Schofield Barracks' hodgepodge collection of single-family residences offers a quick journey back in time. Graceful and airy plantation-style cottages, which hail from the '20s, '30s and '40s, stand near stout, stuccoed homes whose designers seem to have taken their inspiration from Eisenhower-era bomb shelters. Further into the installation's interior are cinder-block structures from the '60s that resemble outdated college dormitories and '70s-ish stacked townhouses, which, although efficient, are as ungainly as they are outdated. As the years marched on, military housing planners slowly but surely surrendered form to function.
However, aesthetics aside, the most noticeable characteristic of many of Schofield's homes is the overall state of disrepair. Some neighborhoods, with saggy rooflines and a majority of homes boarded up, are only a fresh coat of paint away from being considered tenements.
An old soldier may never die, he just fades away. However, old military houses do perish, and they often endure slow, uncomfortable and very public deaths.
"These problems aren't because of poor management," says Harry Jackson, vice president, Actus Asset Management-Hawaii. "The staff are working hard, but they just don't have the money or the resources to get the job done. Congress doesn't have the funds to fix this problem and the military doesn't have the mechanism to do it on the scale that is necessary."
Schofield's housing problems are shared by military bases across the country and the world. According to a 2000 study by the DOD, 70 percent of military housing units, including 163,108 for military families, are considered inadequate or too costly to modernize. The average age of on-base housing is 33 years, and approximately one-quarter of those units are more than 40 years old.
In 1996, with reenlistment rates plummeting, the Military Housing Privatization Initiative was signed into law by President Bill Clinton, enabling the DOD to turn over construction and management of base housing over to the private sector, stretching the military's dollars. (According to a Pentagon study, the reenlistment rate at bases with high-quality housing is about 15 percent higher than at places with low housing quality.) The military's plan is to replace or demolish all inadequate housing by 2007, with private sector help. Planners estimate that under the old system, the same effort would take 20 years and about $16 billion to complete.
The Schofield Puzzle
With 3,336 homes, Schofield is the largest, and, with a high percentage of older homes, arguably the most problematic piece in Actus' privatization puzzle. The base, opened in 1909, is home to two brigades of the 25th Infantry Division, some 21,000 soldiers and their dependents. According to the 2000 Census, only about 15 percent of Schofield's homes were built since 1995. In contrast, 48.5 percent were built from 1940 to 1959 and nearly 14 percent of homes were constructed from 1960 to 1969. Approximately 8 percent of the base's homes were built in 1939 or earlier.
"Schofield is a turn-of-the-century facility, and, therefore, it is not anywhere near master planned," says Jackson, who is responsible for managing the Army RCI housing assets. "Planners looked for the best place to build something, and they built it. So you have a motor pool next to houses and recreation areas. Then you have a barracks, then a gym, then more houses. Things just sort of happened. As we rebuild, we will be developing along a community-based pattern."
However, despite their age and substandard condition, nearly 80 percent of Schofield's homes are occupied. Largely due to Oahu's tight real estate market, approximately 60 percent of Hawaii's military personnel live on base, an almost complete reversal of the rates usually found on Mainland installations.
Actus will be replacing all homes built before 1997, except for a handful of historically significant structures. In Schofield's case, that means virtually every house on base. Planners, therefore, will be literally redrawing the map of the base's residence areas. Although they will have to work within current housing boundaries, the development will be an almost complete transformation.
"We will be working with the existing housing footprint on base, but otherwise, we'll be able to wipe the slate clean," says James A. Evans, president of Actus Asset Management. "It's a tremendous opportunity, a luxury that military planners never enjoyed."
In place of meandering and incoherent neighborhoods, Actus will be building small, tight, villagelike clusters of no more than 100 homes, which will be placed around community centers and recreational facilities. The villages will have their own unique names and individual community representatives or mayors. This type of community-based planning will use some of the neo-traditional principles of an architectural and development movement called "New Urbanism" (see sidebar on page 24).
The homes themselves will be larger, ranging in size from 1,600 square feet to 2,400 square feet, and will contain as many as five bedrooms. Because military personnel are moving as often as every three or four years, the homes will have wider hallways to accommodate gear and furniture being transported in and out. Actus' homes will also have more storage space than most homes on the market.
"The homes will be as good, probably better than what you can find in the private sector," says Wong. "The families will be pleased with the homes that they get."
Actus the Asset Manager
As the construction is completed, Actus' job (and revenue collection) will have only just begun. Besides developer and contractor, the company is also asset and property manager. Company personnel will be running the community centers, maintaining the infrastructure and homes, fixing the plumbing and mowing the lawns. Fifty percent of Actus' revenues will come from the rent it collects from its tenants and 50 percent will come from incentive payments from the military. Customer satisfaction levels will determine the amount of incentive payments.
"The traditional developer sells the house and moves on," says Wong. "We will do surveys once a year, and if those surveys indicate that the families aren't happy, we don't get our incentive fee. I was the general manager of Hawaii Kai and it was a whole paradigm shift. We have a long-term relationship with our customers, which extends through nearly the whole gamut of our organization. Also, in Hawaii Kai we didn't have to consider the morale of our residents."
The Army RCI project is still in development stage, with heavy involvement by the affected communities. Actus officials report that input has been enthusiastic and reaction to some of the initial concepts has been overwhelmingly positive. Even a handful of military personnel have decided to re-enlist after seeing an artist's rendering of some of the future neighborhood.
But Cassiday is still worried for the residents on the other side of the base fence.
"I don't think they've studied the possible effects very much," says Cassiday. "They're playing in our back yard and no one knows how all this will affect the local people."
"We are going to try and keep the amount of military families released into the rental market at a minimum," says Jackson. "It will be a challenge, especially at Schofield, because we don't have too many available homes. It will take a lot of planning, but it can be done. We are a good neighbor, and we're going to keep in close touch with our local communities and businesses and try and enrich everyone."
By David K. Choo
Hawaii Business (January 2004)
To view the complete article with images please visit Hawaii Business on-line at: www.hawaiibusiness.cc
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