April 7, 2022 | Source: Honolulu Civil Beat

‘Nobody Knows What’s Going On’: Kalihi Is Transforming Despite Uncertainty About Rail

Commercial property values have spiked along the rail line since the tax to build the project went into effect. But rail didn’t create that new value, local analysts say.

Right down the street from Honolulu’s giant, unfinished concrete-and-steel rail pathway – and not far from the barbed-wire fences of Oahu’s largest, crumbling jail – lies Kutthroat Barbershop.

Business is literally booming at the popular Kalihi business, which opened six years ago at Dillingham Boulevard’s western end. Loud music and lively chatter typically fill the joint as stylists meticulously trim their clients’ hair. Owner Kalolo Tuihalafata described Kutthroat as a labor of love, a way to benefit the community he grew up in.

But Kutthroat likely will have to move soon – and it’s not clear whether the new location will be in Kalihi. Currently, it’s the only tenant in its building, at 2028 Dillingham. Other businesses, including a restaurant and payday loan service, either left or failed to stay afloat, Tuihalafata said.

Kutthroat Barbershop owner Kalolo Tuihalafatai.
Kutthroat Barbershop owner Kalolo Tuihalafatai. Cory Lum/Civil Beat/2022

The family that’s owned the property for generations decided last fall to put it up for sale. “It’s hard to give up on it,” said Robert Teixeira, who grew up in Hawaii and whose family traces ownership of that parcel back to the islands’ historical Great Mahele land division.

Teixeira’s family wanted to hold on to the property long enough for the arrival of rail and the potential for economic revitalization that comes with it. Unfortunately, “everything’s sitting in limbo,” he said of rail. “We kept hoping, let me put it that way.” With the dearth of tenants, it no longer makes sense financially to hold on, Teixeira added.

The real estate landscape is changing in Kalihi — but thus far it has little to do with rail, according to local industry analysts.

Banking On Rail TOD Project Badge

Instead, the strong demand for industrial properties in urban Honolulu has mainly driven the growth there and in other areas, they say.

That’s despite city leaders having touted for years Kalihi’s enormous potential for what’s known as transit-oriented development, or “TOD,” — higher-density buildings often filled with both commercial and residential space that are a five- to 10-minute walk from the future rail stations. As Honolulu’s city planners describe it, TOD aims to create communities “in which people can live, do all their errands, and enjoy a nice meal all without having to drive to another neighborhood.”

Yet the island’s multibillion transit project has fallen more than 10 years behind schedule, with construction of its elevated guideway slowly lurching toward town. City leaders started collecting the Oahu surcharge to fund rail’s completion 15 years ago. In that time, the megaproject simply hasn’t made enough progress for real estate winners and losers to materialize, industry experts say.

“The calendar is still uncertain, and you still have a lot of question marks,” said Mike Hamasu, research and consulting director for investment firm Colliers’ Honolulu offices.

For instance, will the full 20-mile line actually be built given its latest, severe budget woes? Mayor Rick Blangiardi’s administration now aims to cut the final 1.25 miles and two stations out of the plan, and leave that to maybe be built in some future stage. The FTA will have to sign off on that change.

“If you guaranteed rail would be a reality in three years, you would see more exploration” into the TOD opportunities there, Hamasu added.

In Kalihi, a working-class Honolulu stronghold, many commercial properties have more than doubled in value between 2007 and 2020, according to real estate data Civil Beat purchased from the research company Hawaii Information Service.

Rail guideway construction approaches the Oahu Community Correctional Center, not far from Kutthroat Barbershop. 

To be sure, there’s interest behind the scenes from private developers looking to build TOD around Kalihi’s three future train stations, as well as a station in neighboring Iwilei. That interest is growing, according to local finance executives, urban designers and city planners.

At a handful of Kalihi sites, each about an acre or smaller, developers with the wherewithal to execute such projects don’t own the land yet, according to Guy Churchill, an executive vice president at Bank of Hawaii who co-leads commercial banking there.

“At this point in the game, it’s an issue of getting the land in the right hands,” Churchill said. “There’s not a ton of velocity yet, but there’s interest out there and it’s a matter of how do we (the developers) get a hand on these assets.”

Also holding things up is an expensive, years-long permitting and entitlement process to approve such projects, Churchill said. There’s also what he described as the “stigma” of rail — hesitancy by developers wondering whether the project remains feasible, when it will be completed and where the line will end.

“There’s still a lot of unknowns,” Churchill said.

Meanwhile, the neighborhood’s largest private landowner, Kamehameha Schools, is proceeding with its own plans to overhaul much of the industrial, gritty Kapalama enclave, turning it into a more welcoming commercial and residential area.

A Noodle Shop With Housing On Top?

In Kalihi, city officials hope to change the zoning to allow for more what officials describe as “small-ball” developments along the rail line. Those projects, they say, could go up in concert with much larger plans in the works by some of the state’s most prominent landowners.

“That’s been a plan — to make it easier for a guy with a noodle shop to put housing on top,” said Harrison Rue, the city’s community building and TOD administrator.

At least one of those noodle shops, Chun Wah Kam Noodle Factory on Kalihi Street, hasn’t considered changing its operations once trains start running about a block away, staff there said.

“We haven’t given it much thought” – especially since there’s been so little actual rail construction in the neighborhood, said Gary Chang, whose grandfather started the company in Kalihi in the 1980s.

Artist rendering shows the area with new buildings and improved sidewalks and bike lanes
Artist rendering of TOD improvements along Dillingham Boulevard (bottom) and what the area looks like currently (top). Source: City and County of Honolulu. 

Instead, the company is already moving on a plan to build a central kitchen in Kapolei for distribution of its noodles, Chang said. Then, it will use its Kalihi location strictly for take-out.

Not far from Chun Wah, the construction firm Group Builders doesn’t plan to make any changes to its headquarters.

The building, located about a block from the future Mokauea rail station, saw its value skyrocket 156% between 2007 and 2020, from $1.4 million to $3.2 million, HIS records show.

Group Builders president Aracleto “Lito” Alcantra attributes the increased value to his company’s headquarters being so close to downtown.

He’s keenly aware that a potentially transformative rail line through Kalihi is on its way – his company was a subcontractor that helped build the Waipahu-based operations center, he said.  He foresees the rail line helping his employees get to work more easily, but asked whether he might redevelop the property altogether, Alcantra said “we don’t have plans for that.”

Hamasu, at Colliers, said he expects Kalihi’s commercial property values to spike even more whenever rail finally arrives. Alcantra said the climbing real estate value at his headquarters can still help his construction business, even if he doesn’t intend to sell. Instead, it potentially gives him more equity to leverage or borrow against, he said.

“It’s an asset,” Alcantra said.

Still, Churchill at Bank of Hawaii said mixed-use TOD projects for Kalihi should materialize when questions over rail dissipate. “That’s exactly the kind of stuff that we’re going to start to see more of as time passes,” he said.

Meanwhile, John Jacobson, vice president for research at Locations Hawaii, said that so far none of the massive gains in residential property values can be attributed to rail.

Ripe For Redevelopment

Kapalama has been touted for years as one of the most promising – and lucrative – areas to redevelop real estate along the rail line.

Most of that industrial area is owned by the wealthiest trust in the state.

The city’s 2017 Transit Oriented Development Plan for Kalihi describes Kapalama, and the area surrounding the future “Niuhelewai,” station there as having “the most opportunities for redevelopment in the neighborhood “given vacant land, low-intensity warehouse uses, and consolidated ownership by Kamehameha Schools, which allows for easier lot assembly.”

Since rail’s collection of a general excise tax surcharge began, Kamehameha Schools has been one of Kalihi’s clear real estate winners.

The trust saw many of its warehouse parcels within the industrial Kapalama more than double in value since 2007, the HIS real estate data reveals.

Kamehameha Schools Kapalama Campus with Moowaa Street in Kalihi.
Kamehameha Schools’ Kapalama Campus rests in the foothills mauka of the industrial Kapalama neighborhood. Historically, the area was part of the same Hawaiian ahupa`a land division. Cory Lum/Civil Beat/2022

Kamehameha Schools’ approximately 0.7-acre parcel at 730 Moowaa Street, for example, spiked more than 118% in value between 2007 and 2020, growing from $2.7 million to $6 million.

Just around the corner, its one-acre industrial parcel at 743 Waiakamilo Road grew 109% during the same period, from $4.6 million to $9.5 million, Hawaii Information Service data shows.

The trust owns 105 acres in the area, which lies downslope of its prominent Kapalama school campus.

Nonetheless, Kamehameha Schools isn’t concerned with those gains, top officials say. In a recent interview, Serge Krivatsy, the trust’s director for planning and development of commercial real estate, described the real estate gains as “short-term valuation.” It doesn’t intend to sell.

Kamehameha Schools didn’t respond to follow-up questions on whether having those higher property values changes anything for the institution, such as a better ability to borrow or finance.

Instead, Kamehameha Schools plans to redevelop. The goal, Krivatsy and other trust leaders say, is to add between 4,000 and 5,000 new residential units over the next two decades, as well as some 150,000 square feet of new retail space and as much as 140,000 square feet of new industrial space.

Under the trust’s “Kapalama Kai” plan, many of the blighted warehouses, industrial yards and dive bars and clubs found between Waiakamilo and the Kapalama Canal would eventually be replaced with taller, denser towers.

Honolulu’s elevated transit line is slated to cut right through that area as it crosses over the Kapalama Canal. Notably, Krivatsy and other top officials with the trust say this planned transformation of the area would have happened regardless of rail as many of their longtime land leases expire.

Kalihi-Kapalama aerial photograph.
Kamehameha Schools says it has big plans for its holdings in Kapalama, but would proceed with or without rail. Cory Lum/Civil Beat/2021

“If it (rail) was to disappear tomorrow we would still be moving forward with some sort of conceptual plan to bring abundance to that special place,” Kamehameha Schools Vice President of Community and Aina Resiliency Ka‘eo Duarte said in an interview.

Duarte said that any future development there will fall in line with the trust’s larger goals to perpetuate more local agricultural production across the islands. Kamehameha Schools intends to make much of the current industrial space in Kapalama Kai available for food processing and storage, he added.

Plans for Kapalama Kai are in the “early due diligence and planning stages,” according to Duarte. One of the first phases of the redevelopment “may happen in the next few years” at the Dillingham Plaza shopping center, where a Foodland grocery store and smaller retail stores operate.

Kamehameha Schools isn’t the only property owner in Kapalama, however. Exactly how the other players in the industrial neighborhood might factor into the trust’s plans — and to what extent they’re preparing for rail — remains unclear.

Artist rendering shows the area with new buildings and improved sidewalks and bike lanes
Artist rendering of TOD improvements near the Kapalama Canal (bottom) and what the area looks like currently (top). Source: City and County of Honolulu. 

Among them is Diamond Bakery Co., which has been in business on Oahu for more than a century and has grown to be a household name among the island’s longtime families. Its 0.8-acre Kapalama warehouse on Moowaa saw its value increase 112% between 2007 and 2020, from $3.5 million to $7.5 million, the Hawaii Information Service data shows.

Diamond Bakery Co. President Gary Yoshioka has been one of the area’s commercial leaders, helping to lead the Kalihi Business Association in recent years. He did not respond to several requests for an interview on plans for the Diamond Bakery warehouse, and for the surrounding area.

Next door to Diamond Bakery, at the warehouse owned by Ryan’s Graphics Corporation, company manager Greg Kam said that commercial real estate investors occasionally show up and ask if his outfit is interested in selling the facility.

Kam said that the commercial printing company has hustled to stay in business amid the Covid-19 economic slowdown. He’s aware that the industrial area is poised to change in the coming years, and if any other nearby businesses don’t realize it “they haven’t been keeping track.”

For now, Kam said, Ryan’s Graphics is just “trying to stay afloat” as a local commercial printer. But “if anyone is going to be squeezed out (of the neighborhood) it’s going to be us” based on the growing real estate values, regardless of rail, he added.

Developers Awaiting More Certainty

Rene Matsumura, a principal with the Honolulu-based design firm G70, said that she’s currently working on several active development projects for clients along the future rail line, including in Kalihi.

Most of her clients and their projects at this stage are still in the entitlements phase, she said, in which they’re trying to see how they might take advantage of the zoning changes envisioned for the rail line. The changes aim to eventually allow for taller, denser buildings with both residential and retail components – changes that would make those developments more lucrative.

Currently, Honolulu’s proposed transit-oriented development zoning rules have been laid out in 12 different neighborhood plans along the route.

Map of Kalihi TOD zone
Map of Kalihi TOD zone. 

All of those plans have been adopted by the City Council. They don’t actually change the city’s zoning laws, however – they just serve as guideposts.

So far, the zoning changes in the TOD plans have only been codified into law in one area encompassing West Loch and Waipahu.

In the meantime, developers interested in building TOD in Honolulu neighborhoods before the zoning changes have pursued what’s called an “interim planned development-transit” permit. So far, all of those IPD-T projects have been luxury condo and condo-hotel towers in Ala Moana – a neighborhood that rail might not reach as planned.

Matsumura said that IPD-T adds extra hurdles to the entitlement process, as well as extra time and money to the developer. Some clients looking to build TOD, she said, are waiting for the formal zoning changes to happen before they proceed so that they might avoid the extra red tape.

According to the city’s own guidelines, the full IPD-T approval process, from the initial presentations before a neighborhood board to the final approval, takes at least 185 days.

“It feels like they don’t even know what they’re doing yet,” Rick Matsumoto said of the severely delayed rail project and its potential to reshape Kalihi. Matsumoto’s family business, Aloha Wear Manufacturing, operates out of a warehouse in the neighborhood. “We’re just waiting,” he said. “Nobody knows what’s going on.”

This story was supported by the Fund for Investigative Journalism.

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