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The Aloha state rebounds

While most of the United States has enjoyed roaring growth, there was one troubling exception — Hawaii. But the Aloha State is now on the rebound, in part because it finally kicked its Japan dependence. By Kari Huus.
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Throughout the 1990s, while most of the United States enjoyed roaring economic growth, there was one state adrift in the Pacific — Hawaii, which followed its main client, Japan, into the economic doldrums. But the Aloha State is now on the rebound, in part because it finally kicked its Japan dependence.

Not long ago, Hawaii surfed atop a massive wave of Japanese investment and tourism. The camera-slinging visitors came in ever larger numbers, bought more Gucci bags and ate more sushi — in short, they outspent tourists from elsewhere. Japanese investors drove real estate prices to volcanic highs. And then, the Japanese went away.

Japan’s bubble burst at the start of the decade and the economy worsened through the 1997-1998 Asian economic crisis. Hawaii followed suit. While welfare rolls decline by 50 percent or more in other parts of the United States, Hawaii saw massive lay-offs in its service industry. The island’s real estate prices plummeted.

“In the 1989-91 period, we had a classic bubble economy,” said Scott Bradley, managing director Coldwell Banker Pacific properties. “The Japanese had invested as much in Hawaii real estate as they had in (the far larger) California, so we were very much dependent on Japanese investment. It’s taken 10 years to work some of that out of our system.”

Life after Japan
Things are finally changing for the island economy even as Japan remains firmly in the dumps. Hawaiian shipping companies are adding to their fleets again. According to the Hawaii Visitors and Convention Bureau, nearly 500,000 airplane seats were being added to Hawaii routes in 2000, an increase of nearly 10 percent. A new convention center is drawing more business travelers to supplement the sun-worshipping crowd. There are new real estate investors populating Hawaii’s golf greens — Americans. And some of its Hawaii’s young professionals are coming home.

The state that averaged .3 percent growth from 1990-1995, and grew an average 1.9 percent from 1995-1999 is now edging up towards 3 percent annually. Investment is up, unemployment is 3.8 percent, lower than in the rest of the United States.

One factor behind the turnaround was a concerted effort by Hawaii’s state government to diversify the economy, including new state policies that have helped engineer something of a high-tech boomlet.

Progressive tax laws geared to technology companies — one signed in 1999 and one in 2000 — helped. The state has also set up high-tech incubators, poured money into technology programs at the University of Hawaii and the state’s junior colleges.

A projection of 1998 revenues by new high technology companies — about 700 at the time — suggests the sector would generate $2.2 billion in 2000. “But that’s a pretty conservative estimate,” says Nola Miyasaki, executive director and CEO of the state government’s High Technology Development Corp. (HTDC).

According to Seiji Naya, director of Hawaii’s Department of Business, Economic Development and Tourism, technology accounts for about 40 percent of the recent growth in Hawaii, generating not just profits, but greater productivity. This differs from earlier investment. “We had massive investment from Japan in the 1970s and 1980s, mostly in real estate but not the improvement in productivity. Many times they buy the same building many times over. The investment was there, but not an increase in capacity to produce.”

The state is more effectively selling its position in the middle of the Asia Pacific region as a place where one can quite easily do business with Asia and the United States in the course of a working day.

That was one reason the location appealed to Pihana, an Internet exchange data center that opened its headquarters in Honolulu in January 2000. “We can speak with the mainland (United States) in the morning and Asia in the afternoon,” said Linda Brock, director of marketing and communication. “And when we recruit locally, people are familiar with Asian culture, through family and cultural ties.”

With seed money from Colombia Capital, Goldman Sachs and others, Pihana has hired about 130 people, and plans to expand by another 300 employees around the Asia Pacific region within the year. Even with the current meltdown among many technology companies, Pihana sees this expansion going forward.

There are enough new companies, considering the small market, that Hawaii is struggling with the same skilled labor shortage as the rest of the industry. Last year, it launched a test project — the Kamaina Come Home campaign — an effort to woo back Hawaiians who went to the U.S. mainland, especially Silicon Valley for jobs, leaving behind the depressed state during the 1990s.

The cost of living is higher in Hawaii — real estate may be comparable to Silicon Valley, but an ordinary box of cereal can run $7 — Even so, the climate and quality of life still take some of the pain out of recruiting in a tight market. “We don’t call it cost of living,” said Brock of Pihana. “We call it the price of paradise.”

New wealth, new boom
Also after a piece of paradise is a new wave of real estate investors in the high end of the market—this time they’re high tech millionaires from Silicon Valley and U.S. northwest. “There’s a real influx of money from dot-commers and investment bankers,” said Bradley of Coldwell Banker in Honolulu.

The market shift has been dramatic. In a study last year of home sales of more than $1 million in Oahu, about 50 percent of the purchases were residents of the state, the second largest group were investors from the West coast of the United States, and a small slice was purchased by foreign investors, said Bradley. In 1989-91, he estimates, about 40 percent of the purchases in that high-end market were made by Japanese investors, another 40 percent by Hawaiians, and the rest by others.

The run on vacation homes in the over $2 million category has actually created a shortage, especially in places like the Kohala coast of the big island of Hawaii. “It’s not broad-based investment, but it has a ripple effect, especially in neighboring islands, because the economies are small,” said Bradley.

Ironically, of course, Hawaii is just getting used to its success just as the mainland U.S. economy heads for a slow-down, which could profoundly affect the spending and travel habits of the high-technology crowd over time.

This time, though, the broader economic base may help cushion the state might be buffeted from the pounding it took with Japan’s demise. As they hope for an interest rate decrease from the Federal Reserve Hawaiians have also become more realistic about the challenges faced by their paradise — and that its success is not automatic.

“People know Hawaii for R & R — a sun and surf destination,” said DBEDT’s Naya. “Because of that people don’t think this is a place to do business. Plus, we had done so poorly over the past 10 years, people had sort of discounted us. There is a lot of marketing to be done.”