Tag Archives: Stanford Carr

“Smart Growth” in Hawaii

BY DENNIS HOLLIER

Land-use planning, more than any other public policy, shapes the way you live. It’s responsible for your 60-to-90-minute commute from Kapolei or Hawaii Kai. It’s why you live in a three-bedroom, two-bath home with a two-car garage. It’s what influences you to work downtown, shop in Kakaako and spend your weekends playing on the North Shore or carousing in Waikiki. In short, the decisions of land use planners affect almost everything you do. However, land-use planners have changed their thinking in recent years and that may change the way your children live.

The Auto Age

For most of the past 50 years – call it the Auto Age – planning decisions made the car central to development. In Hawaii, these policies gave birth to new towns such as Kapolei, Mililani and Hawaii Kai. They turned sleepy villages like Kailua and Kaneohe into prosperous bedroom communities. And they stoked the development of shopping centers like Ala Moana, Pearlridge and Waikele. But they also beggared old urban villages like Kaimuki, Kapahulu and Chinatown. They gave us traffic jams, strip malls and a surfeit of parking lots. And they produced a collection of developments that stretches almost continuously from Kalihi to the Ewa Plain.

The response to this urban sprawl is “Smart Growth,” a set of principles that is the central dogma of land-use planning today. According to John Whalen, a prominent Honolulu urban planner, Smart Growth shifts the focus of development from the suburbs to the urban core. Its principles – mixing residential and commercial land use, providing a range of housing and transportation options, and increased density – are intended to create livable, walkable cities. By channeling growth and people to the core, Smart Growth also aims to “keep the country country.” These principles have broad currency on the Mainland; it remains to be seen whether they can address Hawaii’s needs.

Smart Growth seeks to be a solution to the economic, social and ecological problems associated with auto-age development. Its roots, Whalen says, can be traced to a landmark 1974 report from the federal Department of Housing and Urban Development called “The Cost of Sprawl.” Prior to this study, municipal planners generally felt that development – almost any development – amounted to sound fiscal planning. A growing population, rising property values and the arrival of more businesses led to greater tax revenues and a healthier economy. “The Cost of Sprawl” cast doubt on those assumptions. Its thesis was that, as development moves away from the urban core, the cost of building infrastructure – roads, sewers, schools and emergency services that support any development – outstrips any increase in revenue. The report argues that sprawl costs more than it’s worth.

“That was an eye-opener for a lot of communities,” says Whalen. “The message was, if you continue this pattern of sprawl, although it may seem attractive to a lot of local jurisdictions because of added revenues, there’s a cost to all this. That began a kind of reassessment.” On the Mainland, this reassessment led to a flurry of Smart Growth development, an impressive string of planned communities, urban renewals and innovative attempts at TOD, or transit-oriented development, the first cousin of Smart Growth.

Hawaiian Style

Hawaii, as usual, has been slow to catch on, but some principles of Smart Growth have been used here. Stanford Carr’s Peninsula development in Hawaii Kai, for example, was a scrupulous attempt to mix housing choices. “We used a variety of land-planning concepts and diversity of product to address a variety of household incomes and lifestyles,” Carr says. When it was completed in 2003, homes there ranged from one-bedroom apartments for under $200,000, to waterfront, detached, single-family homes priced at over $1 million. Alley parking, an eclectic mix of architecture, and careful landscaping minimized the prominence of automobiles and gave the Peninsula a human scale. A recreation center and pool, and a small public dock provided community focal points.

But the Peninsula isn’t exactly Smart Growth: It is entirely residential, not mixed use. Shaded sidewalks and a waterfront pathway make the community walkable, but there’s really nowhere to go. The only transportation option for residents, besides their cars, is a bus stop just outside the gated community. The Peninsula, despite its Smart Growth inspiration, offers no relief from rush-hour congestion on Kalanianaole Highway.

Perhaps a better example of Carr’s commitment to Smart Growth is his Royal Kunia-Phase 2 project, a proposed planned community in Central Oahu. According to Carr, “That’s 210 acres of residential, 12 acres of school and parks, 20 acres of business, and 103 acres of light industrial.” Like the Peninsula, the Kunia development will have many price points. “We designed the whole community with mixed income. That includes everything from workforce rentals, to entry-level multi-family, to single-family detached development.”

But it’s the mixed use that gets to the heart of Kunia’s Smart Growth pedigree. One of Smart Growth’s catch phrases is “live, work, play.” The inclusion of so much commercial space – combined with workforce housing – makes that concept plausible for many Kunia residents.

Another development with a commercial and residential mix is Castle and Cooke’s Koa Ridge. According to project manager Dean Minakami, plans here include setting aside about 20 acres for a Wahiawa Hospital medical facility and a “big-box” shopping center. The centerpiece of the community will be a kind of village green, a commons area surrounded by commercial space and high-density housing. “This is where you would have all your neighborhood services,” says Minakami. “Daycare, a grocery store, restaurants, a post office. … This will be the vibrant heart of the community.”

More to the point, this kind of mixed use means jobs – Castle and Cooke estimates 2,500 of them – for Koa Ridge residents. Although that may only represent about 20 percent of the population of the 3,500-unit development, it’s still a big step toward the Smart Growth ideal of a self-contained community.

Challenges and Controversies

Developers like Stanford Carr and Castle and Cooke have their critics. Environmental groups like the Sierra Club, and even many urban planners, point out that the goal of Smart Growth is to focus development on underutilized areas within the urban core – in places like Kakaako, Moiliili and Kaimuki. They believe that green-field developments like those at Kunia and Koa Ridge more closely resemble the sprawl that Smart Growth was meant to cure.

Not surprisingly, the developers disagree. Harry Saunders, president of Castle and Cooke, views Koa Ridge as an excellent example of an infill development. “If you come up about 10,000 feet to look at it,” he says, “you’ll see you’ve got Mililani, Kipapa Gulch, Gentry Homes, Waipahu, Crest View, Sea View – Koa Ridge is circled by residential communities.”

In fact, the business model of Koa Ridge relies upon its advantages as infill. “It gives us a great opportunity to kind of leverage off all those rooftops,” says Saunders. For Castle and Cooke, the 30,000 or 40,000 residents of the surrounding developments represent the initial customer base for the restaurants and retail operations in the first stage of Koa Ridge. “It gives us the base for a different kind of community, one utilizing many of the Smart Growth concepts.”

Saunders also points out that infill, especially in the urban core, has its own problems. One of the charms of Smart Growth is that it can help preserve open spaces; higher densities in developed areas make it possible to lower densities elsewhere. But high density and transit-oriented development can strain the infrastructure. “If you look at TOD and infill,” Saunders says, “you’re going into areas where the infrastructure was developed 50 to 100 years ago. That’s why we have all the broken sewers and water mains.” That means redeveloping areas like Moiliili or Kapahulu would require an enormous investment in infrastructure.

That’s true even for greenfield developments like Koa Ridge. Saunders notes that Castle and Cooke is going to build four miles of transmission line down to the sewage plant. “We could never have done that if we had a 200- or a 400-unit project. The problem with TOD and infill is that you have a lot of small owners, so you don’t have the scale of a single large owner. Here, we’re able to afford to do a lot of this because we can amortize it out over 3,500 units.”

Mainland Models

Despite the challenges, Stanford Carr believes that Portland’s Pearl District and San Diego’s Gas Light District suggest that TOD and infill are possible. “These are all urban redevelopment and renewals,” he says. “People are giving up their cars and their one- or two-hour commutes to live closer to work and services like healthcare, restaurants, arts and retail. That’s what places like Kakaako can be.” Of course, the development of Kakaako can also serve as a cautionary tale, and Carr notes that successful TOD will require a detailed review of land-use ordinances and permitting requirements.

As an example, he explains that current rules still emphasize the automobile. “If we’re committed to transit, then we need to start looking at providing relief from mandatory parking requirements,” he says. “One parking stall adds $35,000 to the price of a unit.”

One surprising voice of skepticism about Smart Growth is the city’s new director of transit-oriented development, Terrance Ware. Ware, who has done TOD in transit hotbeds like Washington, D.C., Atlanta, Denver and Dubai, has seen how TOD can transform neighborhoods, but he also knows its limits. Smart Growth proponents often point to success stories like the Fruitvale neighborhood in Oakland, or the Gas Light District in San Diego, but Ware thinks this is misleading. “This is what we all look at as the image of TOD,” he says. “But I could show you just as many, if not more, examples where nothing has happened as a result of TOD.”

He points to depressed, predominantly African-American communities in cities like Atlanta and Washington, where the areas around many transit stations are just as blighted as they were before mass transit. This is true even in San Francisco, where BART has been running for more than 30 years.

Even putative success stories often camouflage the underlying problems of Smart Growth. In some places, Smart Growth has all the trappings of gentrification, as rising property values drive out the people it was intended to accommodate. It’s also not clear that every neighborhood can absorb the increase in commercial space. Merchants in the much-ballyhooed Fruitvale development, for example, complain that foot traffic isn’t sufficient. Apparently, the Fruitvale BART station is more a point of origin than a destination, a consequence that may frustrate TOD projects in places like Waipahu. As Ware notes, it’s unrealistic to expect every station to be its own little mixed-use village.

“My point,” he says, “is let’s be cautious about our approach to TOD.”

Ware also discounts one of the primary arguments for Smart Growth and TOD: the assertion that higher-density development yields more profit. The data comparing multi-family homes, townhomes and single-family homes don’t support this idea. “In most communities,” he says, “the townhomes are the most profitable, because they’re simple, stick-built construction. In higher density projects, you’ve got fire-code issues, you’ve got vertical-circulation issues, there’s the greater cost of the foundation, higher construction costs. … It just doesn’t quite work out.”

The situation in Hawaii is only magnified. “Here, you’ve got higher land costs, higher labor costs and, quite honestly, infrastructure is a real challenge. There are tremendous infrastructural challenges that have been put off.”

Ware acknowledges that financing all the upgrades to that infrastructure – the new roads, sewers, stations and other amenities necessary to attract private development – may be the greatest impediment to TOD. The most common financing tool for this kind of development is a mechanism known as TIF – tax increment financing. This method works on the assumption that property values around a station will appreciate as a result of TOD. This means that property taxes should also increase. TIF attempts to capture that incremental increase in tax revenue and issue bonds against it to pay for the new infrastructure.

But Ware notes that TIF and similar financing tools that have been used elsewhere aren’t magic bullets. And because they rely on property taxes, they’re particularly complicated in Hawaii. “Let’s say 50 percent of the city’s budget already comes from property taxes,” Ware says. That makes it difficult for the city to forego future increases in property-tax revenues, especially while shouldering higher costs for infrastructure and debt service. He also points out that debt service is already a large percentage of the city’s budget.

His point isn’t that TOD can’t work in Hawaii, just that it won’t happen overnight. “Of course,” he says, “in this environment where we’re struggling to pay for basic services, trying to redirect that flow into infrastructure becomes a real challenge. Because, in the short term, when you’re talking about laying off police and firemen and closing libraries, that’s the citizens’ most immediate need. So, what we’re really talking about here is capturing value over the long term.”

Ware points out that the biggest problem facing Smart Growth and TOD may have nothing to do with policy or financing. It may be as simple as overcoming people’s basic conservatism. He points to a photograph of a tidy, middle-class suburban neighborhood – a world of big houses, big yards and two-car garages – and remarks on the persistence of this model for the American dream. “I would argue that people still believe that this is what America should look like,” he says.

 

Smart Growth offers a different vision for auto-oriented areas like this Pearl City stretch of Kamehameha Highway. Over the next three pages, see how the area could be transformed using Smart Growth ideas. 
Photo courtesy of urban-advantage.com

 

As the transformation begins, buildings – not parking lots – now front the streets. The addition of pedestrian-friendly sidewalks and bike lanes put the focus on people, not cars.
Photo courtesy of urban-advantage.com

 

In the next stage, infill construction and mixed uses create a more urban feel. These pictures are the work of Urban Advantages, a consulting firm that provides clients with visual tools to help explain Smart Growth. 
Photo courtesy of urban-advantage.com

 

In this final illustration, medians, narrower roads and on-street parking help create a more walkable district.
Photo courtesy of urban-advantage.com

 

 

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Arrested Development

Allen Leong, KC Rainbow Development
Photo by Oliver Konig

It’s tempting to believe the map. To run your finger over the blue swath of the Pacific and imagine that these are islands. But the turmoil in the world’s financial markets has demonstrated that Hawaii’s isolation is an illusion.

Our economy — particularly capital-intensive sectors like real estate development and construction — has become dependent on access to money from the Mainland and abroad. And the long string of failures in the financial community — Washington Mutual, IndyMac, Bear Stearns, Lehman Brothers — has cut deeply into the availability of that capital.

Some failures have affected Hawaii directly: The Ritz-Carlton development at Kapalua was nearly derailed when Lehman Brothers, the lead bank, went bankrupt last year. Similarly, the credit problems of General Growth Properties have halted construction at its Ward Villages project in Kakaako. But more damaging has been the complete collapse of the market for the Commercial Mortgage-Backed Securities and other financial instruments that have been the conduit for most of the Mainland capital underpinning development in Hawaii over the past six years.

The Return to Local

“Sixty percent of all loans were through the CMBS market,” says Mike Hamasu, director of consulting and research at Colliers Monroe Friedlander.

“The majority of that is now frozen.”

The result has been an exodus of Mainland lenders — with boggling effect. “I can give you our preliminary findings for last year,” Hamasu says. “In 2007, total sales for the state came to $3 billion. Our prediction for 2008 is $780 million,” an astonishing 74 percent drop. This year will be even lower: “We’re anticipating sales of only $580 million in 2009,” he notes.

One of the signature effects has been the emerging dominance of local banks. Central Pacific Bank, for example, came forward to replace Lehman Brothers as the lead bank in the Ritz-Carlton development on Maui. Most developers indicate that deals will now have to include local banks. The change is not an idle one; Hawaii’s local banks have a reputation for conservative underwriting. For developers, this means much higher equity requirements; no non-recourse loans; and, critically, higher presale and prelease requirements before the borrower can access construction loans. All of which are more difficult in a recession.

Presales Are Crucial

For Allen Leong, director of operations for KC Rainbow Development Co., the crisis in the world capital markets is neatly bracketed by two projects along Kapiolani Boulevard: the twin towers of Moana Pacific, completed in early 2007, and the Moana Vista, started in 2007 but still unfinished and awaiting new capital.

“The issue with Moana Vista is the basic issue of every single real estate project: presales,” he says. “At the Moana Pacific, the first tower sold out within six months. The second tower might have taken nine or 10 months to sell out.” Presales of the 492-unit Moana Vista began in 2007, amid much the same atmosphere of optimism and enthusiasm. Hundreds of people showed up when units first went up for auction. “At one point in time,” Leong says, “I had 300 units sold.” But the stream of bad economic news sapped the confidence of buyers, and more than half canceled their contracts.

Only deep pockets kept the project afloat. Indeed, one of the remarkable things about the Moana Vista project is that the work so far has been done out of KC Rainbow’s cash flow. “You have to remember, I just came off a pretty successful project,” Leong says, alluding to the highly profitable Moana Pacific project. “But now, we’re going to have to touch our loan. That’s why presales are so important. Without presales, you can’t touch that construction money.” It’s this gap in funding that has brought construction nearly to a standstill.

Of course, in real estate, it’s possible to view almost any problem as a question of price. In December, KC Rainbow began slashing prices at Moana Vista, with units going for as much as 25 percent off. “I can tell you,” says Leong, “right now, we’re at the right price point. We’ve had very good interest in the project. People like what they see. so, I know there are buyers out there who like the price. I just don’t know how many there are.”

The Contractor’s Perspective

Bill Wilson, president of Hawaiian Dredging, also views Hawaii development through the lens of the current credit crunch. “We’ve got four stories with projects that Dredging is working on, with four sets of issues,” Wilson says. “Others, I’m not sure, have similar examples.

“No. 1 is Maluaka on Maui.” This luxury condominium project – plans included 69 high-end units on 500 acres of land attached to the Kapalua Resort – came out of a partnership that included Dowling Development and investment banker Morgan Stanley. Construction never started. “They put the financing together a year and a half ago,” Wilson says, noting that, at the time, “there were still multiple financing options available.” One by one, though, lenders dropped out as the capital markets collapsed. “They’re not looking at revised development plans,” he says, but the project is moribund.

Hawaiian Dredging’s second story concerns Starwood’s latest planned timeshare on Maui. “In this case, we were two months into construction,” Wilson says. “That was a $300 million job. It was their preferred job in Hawaii.” Nevertheless, despite their investment of time and money, Starwood blanched at pursuing the project in this economic climatem, pulling the plug on construction. “We negotiated a scope-of-work so that it could be put on hold,” Wilson says. “Conceivably, we can start the project again in a year or two.”

Hawaiian Dredging is also the contractor on KC Rainbow’s Moana Vista project, which is Wilson’s third story. In this case, of course, the company was already deeply committed to a project that appeared to be more than adequetly funded. The building was scheduled to be completed by 2009; instead, the tower crate sits idle, and the most optimistic finish date is well into 2011.

“No.4 is General Growth,” says Wilson. “We filed a lien of $9 million against them.” The credit troubles of General Growth Properties, the nation’s second largest developer of shopping centers, and the owner of both Ala Moana and Ward shopping centers, have received a great deal of publicity. Although generally regarded as well-managed, the company has succumbed to the credit crisis. Its inability to refinance its extensive debt has put the company on the brink of failure. The spectre of bankruptcy has halted construction at Ward Villages, General Growth’s most recent development in Kakaako. Once again, Hawaiian Dredging is left holding the bag. “All I want is our little $9 million,” Wilson says. “And the majority of it doesn’t belong to us; it belongs to our sub-contractors.”

Other contractors have a similar view of the market. Roger Peters, the new executive vice president at dck pacific construction (formerly Dick Pacific), says, “I know of five out of about 15 projects that we’re tracking that have stalled because of lack of funding. And that’s not just on Oahu; that’s on Maui and the Big Island and Kauai.” In fact, one of the most alarming aspects of the capital shortage for developers is that it touches almost every sector: residential, commercial, industrial and retail.

Light at the End of the Tunnel?

One bright spot on the horizon is Halekauwila Place, an affordable-housing project in Kakaako being developed by Stanford Carr. This project, like so many others around the state, stalled due to inadequate funding. The details are telling: Although Carr was able to secure a $71 million construction loan from the National Electrical Benefit Fund, that still left him well short of the estimated $86 million price tag for the project. Normally, Carr points out, affordable housing is supported with tax credits, which the developer sells to investors. In the current market, though, there’s no appetite for tax credits. The project looked untenable.

But Halekauwila Place was very attractive to the Hawaii Community Development Authority. As Anthony Ching, executive director of the authority, points out, HCDA was eager to add the affordable housing units to the inventory in Kakaako. They also hoped to retire the tax credits so they couldn’t be sold to another developer. In the end, HCDA agreed to loan the developer $14 million. Perhaps just as important, the terms of the loan allows $4.5 million of that to be used for the critical permitting and entitlement period. “Essentially, the state is providing a soft second mortgage,” says Carr.

Affordable housing is hardly a salvation for developers, though. The margins are just too low, and few government agencies have the cash to lend. Instead, most developers and contractors look at the capital markets and see no near-term solution. They point to Kapolei: The plat map shows a quilt-work of projects in various stages of planning and construction. But most developers agree with the words of Stanford Carr: “If it hasn’t come out of the ground, it’s probably on hold.”

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