Ward Village Block H Economic Impacts

prepared by

Paul H. Brewbaker, Ph.D., CBE

Principal, TZ Economics

606 Ululani St.

Kailua, Hawaii

for

The Howard Hughes Corporation

November 2020; some appendix updates February 2021

EXHIBIT P-13

1

Ward Village Block H Economic Impacts

by Paul H. Brewbaker, Ph.D. TZ Economics1

November 2020; some appendix updates February 2021

Executive summary

Ward Village Block H development and construction in Kakaako upon completion will

deliver 545 new residential condominium units and about 55,000 square feet of commercial or

retail space to an area long targeted for urban renewal. This report estimates key economic

impacts of redevelopment of Block H in present value, 2020 dollars:

• $620 million in total output, $207 million earnings, and more than $39 million in state tax

receipts, cumulatively 2018-2025.

• An annual peak of 789 jobs in 2023; an annual average 441 jobs through 2025.

• Over thirty years, $64 million in county residential property tax revenues.

• Over thirty years, $10 million in county commercial property tax revenues.

• Over thirty years, building operations and maintenance outlays generating $500 million

in output, $158 million in earnings, $31 million in state tax revenues, and an average

annual 49 jobs.

• Retail trade economic impacts of $15 million in output, $4 million in earnings, $824,000

in state taxes, and 127 jobs from an initial year of operation.

• Demographic changes on Oahu, net out-migration, recent population decline, and Covid

Recession may lead temporary changes to become permanent with implications for 2020s

new housing absorption. Cross-currents are explored in several appendixes, but in any

event Block H will contribute materially to economic recovery and growth this decade.

1 This report was prepared by Paul H. Brewbaker, Ph.D., CBE, Principal, TZ Economics of Kailua, Hawaii for The

Howard Hughes Corporation, extending and updating Ward Village Economic Impacts ((December 2014) and

subsequent reports related to the development master plan, under tentative planning assumptions available from the

developer in the late-summer and early-fall of 2020, subject to revision.

2

Block H economic impacts

Statewide economic impacts of Block H development of 545 housing units in the master-

planned Ward Village in Honolulu’s pivotal Kakaako area are estimated using the State of

Hawaii’s published input-output (I-O) economic model.2 Through interindustry linkages final

expenditure on private investment activity—physical capital formation—is associated with a

variety of economic activities directly. Capital formation outlay also is associated indirectly with

economic activity through derived demand for intermediate goods and services that are part of

the supporting production ecosystem. Earnings associated with the jobs created by these

activities induce personal consumption expenditures which have additional economic impacts.

Quantitative estimates of these direct, indirect, and induced effects comprise the economic

impacts attributable to the delivery of hundreds of housing units and commercial and industrial

productive capacity integrated into one high-rise building.

Other economic consequences of the development are notable even though not all are

quantified in this report. Estimates of impacts not quantified in the official I-O model generally

are excluded from enumeration in this report. Those estimates are included in other aspects of

project documentation such as applications for entitlement or public communications. First,

acquisition of entitlement to build on Block H requires payment of fees imposed by the State

($2.2 million) and the City ($7.3 million) that are sufficient to acquire the option to build but are

not physically necessary for building and are excluded from economic impacts enumerated here.

Second, conveyance taxes from Block H totaling $3.2 million are estimated elsewhere but are

neither itemized in the state’s I-O model nor in this report. Similarly, property taxes prior to

completion are not included. Third, no estimate of external social costs—unintended,

uncompensated by-products of development—is included in this report, although fees paid to

jurisdictions often are justified as internalization of negative externalities. Similarly, no estimate

of social benefits of positive externalities from urban agglomeration, economies of scale,

economies of scope, neighborhood valuation changes, or distribution of housing opportunity are

included. Fourth no estimate of the project’s contribution to conservation of natural resources is

itemized in this report.3

Economic impact estimates in this report are adjusted for 2 percent inflation, expressed in

present values at a 3 percent discount rate from the standpoint of the year 2020, and incorporate

productivity growth in job projections consistent with assumptions in the state’s I-O- model.

2 Research and Economics Analysis Division (READ), Hawaii Department of Business and Economic Development

(DBEDT) (August 2016) The Hawaii State Input-Output Study: 2012 Benchmark Report

(http://dbedt.hawaii.gov/economic/reports_studies/2012-io/).

3 The State of Hawaii constitution directs that, “the State and its political subdivisions shall conserve and protect

Hawaii's natural beauty and all natural resources” (Article XI, Section 1), and that, “the State shall conserve and

protect agricultural lands” (Article XI, Section 3). These criteria widely are interpreted and probably were intended

to favor dense urban residential development over suburbanization of agricultural land (the rural district does not

exist on Oahu), though legally inoperative absent legislative standards and criteria for agricultural land preservation.

Ward Village contributes to this mandate through spatial concentration of development in Honolulu’s urban core.

See League of Women Voters of Honolulu (https://www.lwv-hawaii.com/govt/constitution/art11.htm).

3

The remainder of this report is divided into appendixes and this section reporting

quantitative economic estimates of Block H development including details of the dynamic path

of impacts and of state tax revenues by major component. Appendixes detail the housing and

macroeconomic context for build-out of the project through completion in the mid-2020s and

post-Covid Recession changes in economic circumstances which raise uncertainties pertinent to

the assumptions underlying the impact estimates. The distinctive structure of the recession

associated with the global SARS-CoV-2 pandemic, real estate industry disruptions associated

with the recession, and possible consequences of remote work are examined.

In million present-value, constant 2020 dollars, economic impacts of Block H can be

divided between those associated with the process of delivering the new building and the longer-

term, permanent impacts subsequent to its completion. (Current-dollar impacts are reported in

some of the accompanying tables.) The reporting emphasis here is primarily on total impacts of

direct, indirect, and induced effects of inter-industry linkages and the personal consumption

expenditure consequences of earnings from the associated jobs. Output here can be taken as a

total value inclusive of intermediate goods and services, and is a broader measure than value-

added (GDP) per se.

Block H development and construction economic impacts in 2020 dollars, 2018-2025:

• Block H development and construction is associated with $427 million in direct and

indirect impacts on output, and is associated with $620 million in direct, indirect, and

induced output.

• Block H development and construction is associated with $156 million in workers

earnings directly and indirectly, and is associated with $207 million in direct, indirect,

and induced earnings.

• Block H development and construction is associated with $30 million in state taxes

directly and indirectly, and is associated with more than $39 million in direct, indirect,

and induced state tax receipts.

• An annual average of 313 jobs is associated directly and indirectly with Block H

development and construction, and with 441 jobs after incorporating direct, indirect, and

induced effects, with a peak annual count of 789 jobs.

Permanent and ongoing Block H economic impacts in 2020 dollars:

• Block H will be associated over thirty years beginning in 2026 with $64 million in the

present value of future county residential property tax revenues.

4

• Block H will be associated over thirty years beginning in 2026 with $10 million in the

present value of future county commercial property tax revenues.

• Block H will be associated over thirty years beginning in 2026 with operations and

maintenance outlays generating $500 million in the present value of future economic

output, $158 million in the present value of future earnings, $31 million in the present

value of future state tax revenues and an average annual 49 jobs taking into account

productivity growth, including direct, indirect, and induced economic effects.

• Block H will incorporate commercial space suitable for retail use for which an estimate

of initial year operational economic impacts are $15 million in output, $4 million in

earnings, $824,000 in state taxes, and 127 jobs are associated; because commercial space

is adaptable and can evolve no permanent calculation was made, but it should be

recognized as productive capacity with ongoing economic impacts over time.

All of these economic impacts are straightforward estimates calculated using the state’s

input-output model under fairly conventional methodological assumptions, including those

suggested by the state (see footnote 2). Additional details, including annual estimates 2018-2026

which support the totals, are included in accompanying tables: Table 1 on development and

construction impacts, Table 2 on permanent impacts, and Table 3 with annual development and

construction impacts. Other qualitative impacts are not extensively developed but several more

pertinent observations are noted in the appendixes:

1. Oahu’s housing market context has shifted significantly during the last several decades

because of a combination of demographic change and the failure over decades of home

building to have kept up with identified or notional demand. These factors resulted—at

full employment and at the end of the longest recorded economic expansion—in absolute

decline in Honolulu’s population for at least three consecutive years, 2017-2019.

Housing need overall may have abated but urban agglomeration remains important.

2. Peaking in February 2020, the U.S. business cycle and Hawaii’s economy plunged into

the Covid Recession thereafter, the worst since the Great Depression or—for Hawaii—

post-WWII demobilization. Economic recovery is expected to be drawn-out through

much of the early-2020s, during which Block H development and construction will make

a material contribution. Under less than full-employment conditions the economic

multipliers associated with the state’s I-O model will have their fullest impacts.

3. The Covid Recession has accelerated trends in commercial real estate utilization and

shifts in workplace environments disrupting some patterns and giving rise to new ones.

Temporary changes may become more permanent, including penetration of e-commerce

and displacement of brick-and-mortar retail, diminished office space utilization and

expanded work-from-home, and cross-currents of spatial redeployment in housing

demand and workplace distribution.

5

Continuing along the trajectory of its master plan for the 2010s and 2020s, Ward Village

and Block H development will both “play through” the business cycle and, as it turns out in an

unanticipated way, will support economic recovery from the most destructive economic

recession in decades. While the ongoing impact of the global SARS-CoV-2 pandemic continues

to pose uncertainties for 2021 and coming years, the certainty of economic contributions

associated with the development and construction of Block H represent a facet of economic

resilience which stands out against a backdrop of economic disaster recovery. Peaking in 2022-

2023, those economic contributions will have an even more potent impact than in the relative

stable decade preceding them.

6

Table 1. Estimated economic impacts of Block H

Direct + indirect impacts Total impacts

Output 453.7$ 658.8$

Earnings 164.9$ 219.3$

State tax* 31.8$ 41.9$

Average annual jobs 313 441

Direct + indirect impacts Total impacts

Output 426.7$ 620.1$

Earnings 155.5$ 206.8$

State tax* 30.0$ 39.5$

Average annual jobs 313 441

Peak annual jobs (2023) 789

*Disaggregated income, excise, and other tax impacts in Table 3

Construction 193.3$

Architecture, engineering 16.4$

Real estate 22.7$

Management 23.7$

Administrative (indirect costs) 46.5$

Total 302.6$

BLOCK H DEVELOPMENT AND CONSTRUCTION IMPACTS

Million current dollars of present value, or as noted

Million constant (2020) dollars of present value, or as noted

Million constant (2020) dollars of present value, or as noted

Development and construction outlay by economic activity

7

Table 2. Continuing Block H economic impacts

Present value of residential property taxes

over 30 years @3% 63.7$

Present value of commercial property taxes

over 30 years @3% 9.6$

Initial annual retail impacts

Direct, indirect, and induced

Output 15.050$

Earnings 4.081$

State tax* 0.824$

Jobs (initial number) 127

Present value of operations, maintenance over 30 years @3%

Direct, indirect, and induced

Output 500.1$

Earnings 157.7$

State tax* 30.8$

Jobs (average number) 49

*Disaggregated income, excise, and other tax impacts in Table 3

BLOCK H PERMANENT ONGOING IMPACTS

Million constant (2020) dollars or as noted

8

Table 3: Annual Block H economic impacts

Direct and indirect 2018 2019 2020 2021 2022 2023 2024 2025 2026 TOTAL

Output (mil 2020$) 2.0 22.8 21.7 20.6 57.7 105.1 100.0 96.9 426.7

Earnings (mil 2020$) 0.9 9.7 9.3 8.8 21.4 37.5 35.7 32.3 155.5

State taxes (mil 2020$) 0.2 1.7 1.7 1.6 4.1 7.3 6.9 6.6 30.0

Jobs (average number) 19 220 209 198 349 541 512 453 313

Direct, indirect, and induced 2018 2019 2020 2021 2022 2023 2024 2025 2026 TOTAL

Output (mil 2020$) 3.1 34.9 33.2 31.6 84.3 151.7 144.4 137.0 620.1

Earnings (mil 2020$) 1.1 13.0 12.3 11.7 28.4 49.8 47.4 42.9 206.8

State taxes (mil 2020$) 0.2 2.3 2.2 2.1 5.4 9.6 9.1 8.6 39.5

Jobs (average number) 25 285 271 257 491 789 747 665 441

Direct and indirect 2018 2019 2020 2021 2022 2023 2024 2025 2026 TOTAL

Individual income (mil 2020$) 0.038 0.432 0.411 0.391 0.911 1.578 1.502 1.345 6.608

GET (mil 2020$) 0.093 1.062 1.011 0.962 2.602 4.699 4.473 4.321 19.223

TAT (mil 2020$) 0.001 0.006 0.006 0.005 0.015 0.026 0.025 0.024 0.108

Other (mil 2020$) 0.022 0.246 0.234 0.223 0.544 0.955 0.909 0.891 4.024

Direct, indirect, and induced 2018 2019 2020 2021 2022 2023 2024 2025 2026 TOTAL

Individual income (mil 2020$) 0.050 0.571 0.543 0.517 1.216 2.112 2.011 1.806 8.826

GET (mil 2020$) 0.120 1.376 1.310 1.247 3.291 5.907 5.622 5.361 24.234

TAT (mil 2020$) 0.001 0.015 0.015 0.014 0.035 0.062 0.059 0.055 0.257

Other (mil 2020$) 0.033 0.380 0.362 0.345 0.839 1.472 1.401 1.336 6.169

Outlays (mil 2020$) 2018 2019 2020 2021 2022 2023 2024 2025 2026 TOTAL

Construction 25.8 58.6 55.8 53.1 193.3

Architecture engineering prof. 0.2 2.8 2.7 2.6 2.4 2.3 2.2 1.1 16.4

Marketing 0.2 2.5 2.4 2.3 2.1 2.0 1.9 9.3 22.7

Development fee 0.4 4.1 3.9 3.7 3.5 3.4 3.2 1.5 23.7

Other indirect, relocation 0.7 8.0 7.7 7.3 6.9 6.6 6.3 3.0 46.5

Total outlays 1.5 17.5 16.6 15.8 40.9 72.9 69.4 67.9 302.6

*Assumes 2% CPI inflation, 3% (risk-freee) discount rate, and trend productivity growth†One job for one year; average annual labor requirement reductions from productivity growth 3% (s.d. 0.6-0.8 percentage points)

Block H development impacts (million 2020$ in present values,* or job-years†)

Block H state tax revenue impacts (million 2020$ in present values*)

Block H development outlays (million 2020$ in present values*)

9

Figure 1. Block H development job impact attributions (jobs per year)

Figure 2. Block H annual economic impacts (million 2020$, in present values)

0

200

400

600

800

2018 2019 2020 2021 2022 2023 2024 2025 2026

Construction

Management

Real Estate

Architecture & Engineering

Indirect outlays

0

25

50

75

100

125

150

2018 2019 2020 2021 2022 2023 2024 2025 2026

Output

Earnings

State taxes

10

Conclusion

Ward Village Block H development and construction in Kakaako upon completion will

deliver 545 new residential condominium units and about 55,000 square feet of commercial or

retail space to an area long targeted for urban renewal. This report has summarized key

economic impacts of redevelopment in present value, 2020 dollars:

• $620 million in total output, $207 million earnings, and more than $39 million in state tax

receipts associated with multiplier effects cumulatively 2018-2025.

• During an economic impulse ramping up to a peak of 789 jobs in 2023, an annual

average 441 jobs through 2025.

• Over thirty years beginning in 2026, $64 million in county residential property tax

revenues.

• Over thirty years beginning in 2026, $10 million in county commercial property tax

revenues.

• Over thirty years beginning in 2026, building operations and maintenance outlays

generating $500 million in output, $158 million in earnings, $31 million in state tax

revenues, and an average annual 49 jobs.

• Commercial space suitable for retail use with operational economic impacts of $15

million in output, $4 million in earnings, $824,000 in state taxes, and 127 jobs, initially.

In addition, appendixes provide details on three macroeconomic considerations pertinent

to Block H redevelopment. First, demographic change and decades of building constraints leave

a legacy of housing shortages that, entering the 2020s, may be moot. Three years of absolute

decline in Honolulu’s population, 2017-2019, dampen prospective housing need, although urban

agglomeration remains an important economic force. Second, Hawaii’s economy plunged into

the Covid Recession in late-winter 2020. Economic recovery is expected to be drawn-out,

during which Block H redevelopment will materially contribute under less than full-employment

conditions through economic multipliers’ fullest impacts. Third, the Covid Recession has

disrupted workplace environments. Temporary changes may become permanent: e-commerce

displacing retail, diminished office space utilization, expanded work-from-home, and other

spatial economics cross-currents. Block H constitutes not just continuing fulfillment of the Ward

Village master plan, it may well benchmark urban transformation in Honolulu during the post-

pandemic reboot of Hawaii’s economy in the 2020s, at a time when investor interest is

undergoing a major structural change.

11

Appendix 1: Oahu household and population context for 2020s

During the late-2010, in spite of full employment conditions, low mortgage interest rates,

historically unsurpassed Oahu housing affordability,4 and the longest U.S. economic expansion

in recorded history, net domestic outmigration from Oahu exceeded all other sources of

population growth combined.5 For the first time since the 1870s Honolulu experience three

consecutive years of peacetime population decline, 2017-2019. Consequences for Oahu housing

demand projections were profound.

Among reasons for population decline on Oahu may have been military force reductions

associated with post-Afghanistan and post-Iraq disengagement. Similar population declines over

single years were associated with the post-Cold War “Peace Dividend” in 2000 (base

realignment and closure), and with the surge during the War in Iraq in the early-2000s in 2007.

Oahu home prices also were high and had been rising prior to 2007 during a housing asset

pricing bubble, but not 2000. On both occasions, however, net domestic outmigration from

Oahu was associated with net domestic in-migration on the Neighbor Islands. Not in the 2010s.

None of these factors other than the possible role of military downsizing explain the late-

2010s Oahu population decline. Nothing since 19th century epidemic disease outbreaks has been

associated with multi-year Oahu population declines except post-WW II demobilization. During

the late-2010s few other states to experience absolute population decline. Virtually all of those

states were engaged in export of carbon-based fuels like coal or, at $120/barrel for petroleum,

benefited from fracking as an oil exploration method. After 2014, at $60 per barrel population

loss from states like West Virginia, the Dakotas, Alaska, and Wyoming had an obvious forcing

factor. Honolulu’s population loss was not systemically associated with falling global energy

commodity prices. Instead, Oahu’s population loss was idiosyncratic to local economic

conditions, while across the rest of the state tourism grew throughout the 2010s.6 With Oahu’s

4 The mythology of Honolulu housing inaffordability has been propagated to the point where it no longer bears any

reference to the actual data. While it is true and—measurably since 1964—has always been true that Honolulu’s

cost of living has ranked among the highest metropolitan statistical areas in the U.S., it is likewise true that

measured conventionally as an index of the ratio of monthly house payment to monthly 4-person family median

income at prevailing 30-year fixed rate mortgage rates under conventional residential mortgage assumptions,

housing affordability in Honolulu during the 2010s approximated the best years ever in calculations extending back

to 1976, around the time of the creation of the Kakaako Redevelopment Authority (now the Hawaii Community

Development Authority).

5 This includes natural increase—births less deaths—and net international migration, collectively. See Hawaii

DBEDT Estimates of the Components of Resident Population Change for Counties in Hawaii: April 1, 2010 to July

1, 2019 (https://census.hawaii.gov/wp-content/uploads/2020/03/co-est2019-comp-15.xlsx).

6 Constant-dollar or real visitor expenditures—tourism receipts—on the Neighbor Islands grew continuously during

the 2010s. On Oahu, real visitor expenditures peaked in 2012 following three years of recovery from the Great

Recession ending in 2009, and never exceeded the 2012 total through 2019. A strong U.S. dollar tended to reduce

real daily expenditure of foreign tourists and deterred travel demand altogether. A hostile diplomatic environment

towards Chinese and elsewhere during the late-2010s didn’t help. Oahu lodging utilization maximized in the early-

2010s. Rising lodging costs cannibalized other tourism expenditures by reducing average lengths of stay. Oahu’s

lodging inventory has never been higher than in 1986, even including rapid growth of vacation rentals during the

late-2010s. Lodging capacity constraints subverted growth in travel volume by rapidly raising hotel room rates.

12

principle export, tourism, and military-related economic activity stagnating the Oahu economy

struggled even at full employment, a characteristic reflecting lack of labor supply. Residents

“voted with their feet” in the late-2010s as economic opportunity was stifled.

As a consequence of unanticipated population declines on Oahu, robust official

projections for household formation and associated estimates of housing need proved to be

excessive. Oahu homebuilding during the 2010s was lowest in any decade since the 1940s (with

world war). Baseline projections of housing demand around 2,600 units per year, 2015-2025,7

were nearly 20 percent higher than actual numbers of housing units authorized by building

permit 2010-2019 (median 2,211.5 units). Unanticipated population declines 2017-2019 were

incorporated in later projections of new household formation and housing need, subsiding to an

average 1,600 units per year, 2020-2030, within a range from about 1,040 units to 2,140 units.8

These projections were based on pre-Covid population trends; uncertainty attaches to the post-

Covid outlook. Cumulatively, 2010-2019, an estimated 74,837 residents left Oahu on net.9

While not unique to the 2010s (Oahu residents have been moving to the Neighbor Islands for

decades), by overwhelming other sources of population growth in the late-2010s these

movements significantly undermined reliability of housing need projections.

Pervasive mythology—that housing affordability has worsened (in the 2010s as good as

ever for 40 years), that every year is a tourism record (the record is 1989), that full employment

is good irrespective of labor shortages from workers leaving—distorts interpretation of Oahu

housing market conditions. Retrospectively, homebuilding on Oahu fell short of notional

demand for four decades, using the same models applied to past data to project into the 2020s.

But many persons constrained from homeownership or independent living during the last several

decades are no longer around to matter. Some left. Some lived their adult lives with parents and

extended families. Some died. Saying that “there are 40,000 housing units needed” from a

shortfall since the 1980s is meaningless if housing-constrained persons simply left. Forget about

economic opportunity foregone because workers were deterred from moving to Hawaii. Either

way, at 3 persons per household it is doubtful that 120,000 persons are waiting, in 2020, for

policy-makers to “solve the housing problem.” Official projections now imply 10,000 fewer

Oahu households by the mid-2020s than were projected less than five years earlier, before taking

into account post-Covid population changes. Uncertainty about future Oahu housing need has

increased substantially.

7 Hawaii DBEDT (April 2015), Measuring Housing Demand in Hawaii, 2015-2025

(https://files.hawaii.gov/dbedt/economic/reports/2015-05-housing-demand.pdf), page 24.

8 Hawaii DBEDT (December 2019), Hawaii Housing Demand: 2020-2030,

(https://files.hawaii.gov/dbedt/economic/reports/housing-demand-2019.pdf), pages 8-9.

9 See also Hawaii DBEDT (December 2019) Hawaii Migration Flows: 2013-2017

(https://files.hawaii.gov/dbedt/economic/reports/Hawaii_Migration_Flows_2013-2017_Dec2019.pdf), and the

substantially overestimated (June 2018) Population and Economic Projections for the State of Hawaii to 2045

(https://files.hawaii.gov/dbedt/economic/data_reports/2045-long-range-forecast/2045-long-range-forecast.pdf).

13

Figure A1-1. Oahu population trends and implied household projections

based on various estimates of Oahu housing need during the 2010s and 2020s

Note: Overlapping shaded bandwidths around the three projections comprise upper and lower bounds around

DBEDT baseline (2015) and average (2019) estimates, and 99 percent confidence interval around TZE (2017)

estimate.

Sources: Hawaii DBEDT Data Warehouse (http://dbedt.hawaii.gov/economic/datawarehouse/), State of Hawaii

Data Book, Tables 1.49, 1.50, 1.52 (http://dbedt.hawaii.gov/economic/databook/2019-individual/_01/),

Measuring Housing Demand in Hawaii, 2015-2025 (April 2015)

(https://files.hawaii.gov/dbedt/economic/reports/2015-05-housing-demand.pdf), Hawaii Housing

Demand: 2020-2030 (December 2019) (https://files.hawaii.gov/dbedt/economic/reports/housing-demand-

2019.pdf), TZ Economics.

340

330

320

310

300

290

280

1,000

960

920

880

1995 2000 2005 2010 2015 2020 2025

Thousand households Thousand persons

(log scale) (log scale)

U.S. recessions shaded

Oahu

pre-Covid

population (right scale)

Households

(to 2016)(left scale)

Households

(to 2019)(left scale)

DBEDT (2019)(left scale)

TZE

(2017)(left scale)

DBEDT (2015)(left scale)

14

Appendix 2: COVID-19 and the macroeconomic backdrop

Worldwide spread of the novel coronavirus SARS-CoV-2 during winter 2020 led to a

pandemic threat from the associated disease, COVID-19. In response the State of Hawaii on

March 25, 2020 initiated shelter-in-place orders and a mandatory 14-day quarantine for arriving

air passengers. This Hawaii lockdown remained in place until May 31, 2020. Initial uncertainty

about the novel coronavirus’s infectiousness, transmission, and lethality prompted endogenous

household consumption contraction out of risk-aversion. Combined with non-pharmaceutical

interventions (NPI), Hawaii successfully mitigated and contained the coronavirus in the spring.

By the end of May some days reported zero new COVID-19 cases Hawaii. Later in summer

2020, confirmed daily COVID-19 case counts were in resurgence on Oahu. The City & County

of Honolulu imposed a second lockdown for one month. By October 15, 2020 a pre-flight Covid

testing protocol was implemented and air travel to Hawaii restored without a mandatory

quarantine. Long, slow economic recovery was anticipated to accompany reopening tourism.

Measured by real GDP growth the U.S. recession was the steepest since the 1930s.10

Hawaii’s recession matched demobilization after World War II. Contraction was abrupt:

• 2020Q1 U.S. real GDP declined at a −5.0 percent annual rate, Hawaii at −8.9 percent.

• 2020Q2 U.S. real GDP declined at a −31.4 percent rate and at −42.2 percent in Hawaii.

• 2020Q3 U.S. real GDP rose at a +33.1 percent rate and at +31.3 percent in Hawaii.

• Resurging COVID-19 cases and mortalities in 2020Q4 threatened recovery.

The surge in Oahu COVID-19 cases and Honolulu’s second lockdown (August 27-

September 24, 2020) were seen in renewed economic contraction in high-frequency, daily data.

The Covid Recession was a rare consumption-led recession, precipitated by a jump in

precautionary saving in initial months of the outbreak. Ordinarily, recessions reflect decline in

investment activity rather than consumption. Since the Great Depression of the 1930s investment

led business cycle dynamics generally, often from interest rate movements associated with

monetary policy changes. Only during Operation Desert Shield from July-December 1990 and

Operation Desert Storm from January-March 1990 had the U.S. experienced consumption-led

recession since the Influenza Pandemic of 1918-1919.

Leisure-time activities were hardest hit by the contraction in consumption, and more

generally services associated with air travel and tourism, so Hawaii’s economy was harder hit

than other U.S. states. Hawaii’s unemployment rate was the highest nationwide and Honolulu’s

highest among major U.S. metropolitan areas. The increase in U.S. precautionary savings was

the flip side of a massive consumption decline.

10 National Bureau of Economic Research (https://www.nber.org/research/data/us-business-cycle-expansions-and-

contractions).

15

Figure A2-1. The Covid Recession originated in a rise in precautionary savings, corresponding

decrease in personal consumption; U.S. monthly personal savings rates through September 2020

Sources: Retrieved from FRED, Federal Reserve Bank of St. Louis, U.S. Bureau of Economic Analysis

(https://fred.stlouisfed.org/series/PSAVERT).

Economic forecasting was complicated by the Sudden Stop but initial disruption from

COVID-19 gave way to greater epidemiological clarity and consensus emerged about the

economic recovery and its timing. By September 2020:

• The FOMC forecast an annual 2020 real U.S. GDP decline of −3.7 percent, followed by

+4.1 growth in 2021, subsiding over 2022-2023 to a longer run average of +1.9 percent.

• Private industry, forecasting close to actual outcomes in 2020Q2 and 2020Q3, forecast

quarterly growth of +4.9 percent in 2020Q4, averaging +3.6 percent during 2021.11

• Hawaii real GDP growth forecasts were −12.3 percent and −11.2 percent for 2020, and

+2.1 percent and +1.2 percent for 2021 (Hawaii DBEDT and UHERO, respectively).12

Ward Village development of Block F and Block H should be expected to make a

material economic contribution to the post-Covid economic recovery in this context.

11 Federal Open Market Committee (FOMC), Federal Reserve Board Summary of Economic Projections

(https://www.federalreserve.gov/monetarypolicy/fomcprojtabl20200916.htm).

12 Hawaii DBEDT (August 26, 2020) (not archived; http://dbedt.hawaii.gov/economic/qser/outlook-economy/),

UHERO (September 25, 2020) (https://uhero.hawaii.edu/uhero-state-forecast-update-hawaii-in-early-stages-of-

recovery-then-a-setback/).

0

5

10

15

20

25

30

Percent of disposable personal income

2013 2014 2015 2016 2017 2018 2019 2020 2021

24.5%

18.7%

COVID-19

14.3%

33.6%

14.8%

18.1%

16

Figure A2-2. Quarterly U.S. real GDP growth estimates and forecasts

(a) Contributions to quarterly real GDP growth by aggregate expenditure component

(b) Composition of Hawaii real GDP growth by industry through 2020Q3

Sources: Bureau of Economic Analysis, U.S. Dept. of Commerce

(https://apps.bea.gov/iTable/iTable.cfm?reqid=19&step=2#reqid=19&step=2&isuri=1&1921=survey),

data through third quarter 2020 (December 23, 2020 revision, and (https://www.bea.gov/data/gdp/gdp-

state) quarterly Hawaii data posted December 23, 2020, next release March 26, 2021.

-30

-20

-10

0

10

20

30

2018Q1 2019Q2 2020Q1 2021Q1

Contributions to percent change in real U.S. GDP (quarterly at s.a. annual rates)

(3.0%)Personal Cons. (1.7%)

Net exports (−1.5%)

C

−5.0%

−31.4%

+33.1%

+4.0%

−

−C

−NX

-50

-40

-30

-20

-10

0

10

20

30

Quarterly percent changes at annual rates

2019:Q1 2019:Q2 2019:Q3 2019:Q4 2020:Q1 2020:Q2 2020:Q3

0.1

−1.0

1.5 2.7

−8.9

−42.2

Accommodation

and food services

+31.3

Other

Retail trade

Health care

State, county govt.

Transportation

Arts, entertainment, recreation

17

(c) Quarterly U.S. real GDP growth forecasts, December 2020

(d) Annual U.S. real GDP growth forecasts, December 2020

Sources: National Association for Business Economics December 2020 outlook survey

(https://www.nabe.com/NABE/Surveys/Outlook_Surveys/December_2020_Outlook_Survey_Summary.a

spx), Federal Open Market Committee, Federal Reserve Board (December 16, 2020) Summary of

Economic Projections (https://www.federalreserve.gov/monetarypolicy/fomcprojtabl20201216.htm).

-30

-20

-10

0

10

20

30

Quarterly percent changes in real GDP at annual rates

2018 2019 2020 2021 2022

High 5

Low 5

U.S. recession

-6

-4

-2

0

2

4

Percent change, year-over-year

2014 2016 2018 2020 2022 2024 2026

1.8%

−2.4%

+4.2%

U.S. recession shaded

Highest

Lowest

18

Appendix 3: Hysteresis and post-Covid residential and commercial real estate

Large, sudden economic changes to exchange rates or global commodity prices have

been observed to cause temporary changes in economic behavior which have permanent

elements, even after the original factors’ influences have receded. An example is when

unemployment rises during a recession, but then persists after economic recovery because of

towards automation. Another example is when home currency appreciation causes a

“beachhead” effect: foreign exporters solidify distribution networks, leaving imports unchanged

if the home currency later depreciates. Hysteresis is the failure of a changed characteristic to

return to its original value when the change is removed. The coronavirus pandemic may be

changing residential and commercial real estate in such ways.

In residential real estate the main forcing factor influencing temporary changes which

could become permanent, through the labor market, is work-from-home (WFH) or remote work.

On the “supply” side, internet technology enables telecommuting through apps for file-sharing

and video communication. On the “demand” side, larger proportions of workers now are

engaged in WFH post-Covid. Large numbers of workers and firms now indicate permanent

post-Covid intentions to sustain at least part-time remote work. Migration to suburbs and exurbs

is occurring among some households, but there are also counterflows towards urban core

housing by workers seeking proximity of active social life to counterbalance isolation associated

with remote collaboration.

Commercial real estate utilization was disrupted by the Covid Recession. Lodging

excess capacity was extreme when Hawaii tourism shut down. Office vacancies in Downtown

Honolulu were 10 percent or higher pre-Covid, suggesting even higher rates may persist post-

Covid because of WFH. Retail and food services industries suffered from fewer residents dining

out and disappearing visitor expenditures. Lender forbearance and foreclosure and evictions

moratoriums extend through 2020, but they only defer a reckoning which will have to be

managed. Surging e-commerce, with brick-and-mortar retail brands increasing home delivery

capabilities, contrasted with Covid bankruptcy filings by major national retail brands. The

commercial real estate disruption is probably more significant than in residential real estate.

While the future of real estate remains unclear, some consequences seem likely.

Renovation of existing residential and commercial capacity is likely to augment or displace new

construction. Among forcing factors illustrated below are:

• High-frequency shifts in consumer spending towards food at home vs. away from home.

• High-frequency mobility data from smartphone GPS locations showing persistent

increases in time at home and decreases in time away from workplaces.

• Growing Oahu residential condominium for-sale inventories, shrinking single-family for-

sale inventories.

• ⅓ “always” and ¼ “sometimes:” majorities of surveyed U.S. workers now indicate high

“frequency of remote work in response to COVID-19” (October 2020).

19

Figure A3-1. High-frequency (daily) data pre- and post-Covid

(a) Oahu time at home vs. at workplace (etc.) (Google mobility)

(b) Hawaii (statewide) spending, food-at-home vs. away from home (credit/debit cards)

*On screen labeling says retail and restaurants, but actual data download is called “gps_retail_and_recreation”

Sources: Google Mobility, via Opportunity Insights (https://tracktherecovery.org/), seasonally-adjusted daily

statewide Hawaii credit/debit card spending through October 5, 2020 from Affinity Solutions (relative to

Jan. 4-31); daily Oahu mobility data through October 9, 2020.

-1.2

-0.8

-0.4

0.0

0.4

Jan Feb Mar Apr May Jun Jul Aug Sep Oct

Grocery and food stores

Food services

Statewide order: “stay at home” Oahu lockdown

Arts, entertainment, recreation

Apparel and accessories

Proportion of January spending

-.6

-.5

-.4

-.3

-.2

-.1

.0

.1

.2

Time relative to Jan 2020

Feb Mar Apr May Jun Jul Aug Sep Oct

Statewide order: “stay at home” Oahu lockdown

Residential

Grocery and pharmacy

Retail and recreation*

Workplace

+13.4%

−18.9%

−37.1%

Retail

20

Figure A3-2. COVID-19 and Oahu residential markets

(a) Oahu single-family home sales inventory shrinking, condominium sales inventory growing

(b) Post-Covid median single-family Oahu home prices rising, condominium prices sagging

Sources: Honolulu Board of Realtors, Hawaii DBEDT (http://dbedt.hawaii.gov/economic/mei/) monthly data

through September 2020; seasonal adjustment and trend regression (on stationary component, June 2011 –

June 2018) by TZ Economics. Projected annual appreciation rates depicted as dashed lines.

2.0

2.5

3.0

3.5

4.0

Active (total) listings/sales (ratio)

1.2

1.3

1.4

1.5

1.6

New listings/sales (ratio)Monthly units, s.a. (log scale)

700

600

500

400

300

Monthly units, s.a. (log scale)

500

400

300

2002015 2016 2017 2018 2019 2020 2021

Condominium

Single-family

Condominium

Single-family

Condominium

Single-family

Condominium

Single-family

New listings

Sales of existing homes

Months of new inventory remaining

Months of inventory remaining

2015 2016 2017 2018 2019 2020 2021

COVID-19

500

450

400

350

300

900

800

700

600

2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

Condominium (left scale)

Single-family (right scale)

COVID-19

Monthly, thousand dollars, s.a. (log scale)

U.S. recession shaded

4.0%

5.2%

21

Figure A3-3. Post-Covid work-from-home (WFH) and remote work survey data

(a) Gallup worker surveys of “frequency of remote work in response to COVID-19”

(b) NABE firm surveys, “Did your company implement new work from home policies?”

Sources: Gallup (October 13, 2020), “COVID-19 and Remote Work: An Update”

(https://news.gallup.com/poll/321800/covid-remote-work-update.aspx); National Association for Business

Economics (NABE)

(https://nabe.com/NABE/Surveys/Business_Conditions_Surveys/January_2021_Business_Conditions_Sur

vey_Summary.aspx); survey question asked of respondents January 4-12, 2021 was, “Did your company

implement new work from home policies due to the health crisis?”

0

25

50

75

100%

April May June July August September

51%

18%

31%

33%

25%

42%

Always

Sometimes

Never

All employees Most employees Some employees

35.5% 30.1% 19.4%

No employees n.a.

10.8% 4.6%