Quarterly Newsletter July - September 2020

P r i n t  |  R e p l i c a

The September median price of single-family homes was $880,000 (13.3% higher than September 2019) and of condos was $445,000 (unchanged from September 2019) as the COVID-19 pandemic continues to shape residential real estate demand.  The number of single-family home sales during the month of September was 12.7% higher than last year and the number of condo sales dropped 2.1%.  Record low interest rates are fueling demand.  Pending sales of single-family homes are 38.3% higher than last year and pending sales of condos are 7.5% higher than last year.  There is only 1.9 months of single-family home inventory due to soaring demand and 18.4% fewer new listings than last year.  Condo supply continues to creep up and currently stands at 4.0 months of inventory.

 The University of Hawaii Economic Research Organization (UHERO) predicts that Hawaii’s economy will not start to see sustained improvement until the summer of 2021 based on assumptions that a vaccine will become widely available the second half of 2021.  The article points to Hawaii government’s failure to take advantage of a two-month period without COVID-19 cases to prepare for an eventual resurgence smothering the beginnings of an economic recovery and delaying the restart of tourism a second time.  UHERO reports that employment in leisure and hospitality is under 50% of pre-pandemic levels and has had a significant impact on transportation, retail, and food service.  Industries outside of tourism have experienced high single-digit percentage declines.  Construction has been the only bright spot thanks to federal contracts for large military projects.

 A recent survey of landlords and property managers conducted by UHERO found that roughly 6% of tenants were late on rent versus 3% before the pandemic and an additional 9% of rental units are currently vacant versus 4% prior to the pandemic.  The report stated that some tenants have moved in with family and friends while others have departed for the mainland in search of opportunities.

A Mixed Plate of Talk Story

 It has become clear that Hawaii’s state government has failed Hawaii’s citizens.  On August 27^th, Governor David Ige approved Mayor Kirk Caldwell’s request to shut down all “nonessential” businesses for two weeks, at a minimum.  The Honolulu Star Advertiser reported that 1,000 tests processed on Oahu were botched when the test tubes were not labeled with the patient’s information and those individuals would have to retake the test.  DOH Director Bruce Anderson announced his retirement on August 31, 2020 effective September 15, 2020.  On Wednesday, September 2^nd, Dr. Emily Roberson who was hired on July 16^th to head the contact-tracing program, asked to be placed on leave for an unspecified amount of time.  State epidemiologist, Dr. Sarah Park, was placed on paid leave on September 3^rd, as calls for her ouster had reached a crescendo.  Additional drama has ensued when the state closed H-3 to conduct testing without obtaining the federal government’s permission and has now put $180 million in federal highway funding at risk.  H-3 was built to allow quick troop deployment from Kaneohe Marine Corps Base to Joint Base Pearl Harbor-Hickam in case of a national emergency.  On September 6^th, U.S. Senator Brian Schatz summed up the state and county responses to the COVID-19 pandemic when he urged Governor Ige to seek federal assistance with an outbreak at a Hilo veterans home stating, “I am concerned that the state and county have been too slow to respond to the crisis with the urgency it demands, including with a request for more federal assistance.”

 Hawaiian Airlines laid off 2501 employees or roughly one-third of its staff on Thursday, October 1, 2020 as the CARES Act Payroll Support Program (PSP) expired.  The company is currently preparing for the state to allow trans-Pacific passengers to avoid the 14-day quarantine by obtaining a negative COVID-19 test within 72 hours of their flight starting October 15^th.  Hawaiian is partnering with Worksite Labs to set up exclusive testing sites initially near Los Angeles and San Francisco international airports and then adding additional sites near other airports during the next few months.  The airlines will continue to fly its planes at 70% capacity to allow for social distancing.  Hawaiian Airlines lost almost $175 million in the second quarter as revenue plunged 92%.

 United Airlines will offer rapid COVID-19 tests at San Francisco International Airport the same day of travel for their San Francisco to Hawaii flights starting October 15^th.  GoHealth Urgent Care will administer the tests and have been working with United to offer rapid on-site testing for flight attendants since July.  American Airlines will offer the test at Dallas-Fort Worth International Airport and Alaska Airlines will offer the test in Seattle.

 Governor David Ige is currently allowing the four county mayors to opt out of the state’s pre-travel testing program due to begin October 15^th and keep the 14-day quarantine requirements in place.  Ige turned down Kauai County’s proposal to establish a post-travel testing program (two-test option) because of concerns that it will deplete the state’s limited supply of test kits.  Hawaii Island Mayor Harry Kim has decided not to participate in the state’s pre-travel testing program if a two-test option is not provided and at one point proposed a three-test option.  Kim has cited the 32 deaths at Yukio State Veterans Home as the reason behind his stance even though it has been widely accepted that the virus spread and resulting deaths were a failure of the home’s management to implement basic protocols needed to protect the vulnerable population.  A vacation rental manager expressed dismay by Kim’s decision stating, “the latest outbreaks here on the Big Island have been associated with the veterans center.  Those should be the places that have the restrictions, not the rest of us.  The emotional distress I’ve seen some of my employees under, it breaks my heart.  There is much more harm happening by not even making a baby step to open the tourism industry.”

 The city council pushed back on Mayor Kirk Caldwell’s second shutdown that began on August 27th when he extended it in mid-September despite falling COVID-19 infection numbers.  The administration has argued that reducing high risk behavior requires behavior modification.  Frustration boiled over when the mayor opened parks and beaches to individuals on September 8^th but not families.  City Councilwoman Heidi Tsuneyoshi argued that the lockdowns are going too long, and that Caldwell is ignoring the consequences to the public’s mental health and to the impact on small businesses.  She stated that, “We cannot be in the business of behavior modification at this point.  We are beyond the point of having conversations even about this.  The businesses have been in limbo for seven months now.  There are generational businesses that have closed down, and we’re sitting here hearing about behavior modification.”  Lt. Governor Josh Green also pushed the mayor to relax the restrictions in parks and beaches arguing that families with children should be allowed to enjoy the parks and beaches.

 Mayor Kirk Caldwell loosened Oahu’s second shutdown on September 24^th allowing small gatherings of five or less in public spaces, businesses and attractions to operate at 50% capacity, and restaurants to operate at 50% capacity with tables of 5 people in the same household or less.  Bars, night clubs, arcades, helicopter tours, and legal vacation rentals must remain closed.

 A 9/10/2020 Civil Beat article highlighted the mayor’s spending priorities related to the federal CARES Act passed in March.  Honolulu has budgeted $30 million in federal aid for the Honolulu Police Department to enforce the mayor’s emergency orders and earmarked only $25 million to help locked down residents pay for rent, utilities, and child-care. Only $2.4 million of the $25 million has been distributed because aid has been bogged down by overly onerous documentation requirements.  Meanwhile the city spent over $546,000 on 45 ATVs and UTVs that officers are riding in beaches and parks to cite people violating the emergency orders.  Officers have issued over 5,000 citations on September 17^th and 18^th for alleged violations that if found guilty of a misdemeanor can be fined up to $5,000 and spend a year in jail.  Residents have complained about being cited for walking alone in empty parks and beaches that pose no threat of spreading COVID-19.  Police even cited U.S. Surgeon General Jerome Adams for visiting a closed park while he was here in the state to help Hawaii ramp up its testing program.  Council members have suggested budgeting funds on education and hospitals versus the $13.8 million budgeted for overtime expenses and $4.7 million in police services officer contract positions.

 The Honolulu Authority for Rapid Transit (HART) continues to struggle with its delayed and over budget rail project and many of the wounds are self-inflicted.  The latest drama occurred when the Human Resources Committee recommended that HART fire its CEO Andy Robbins after his contract expires at the end of the year.  Board members voted 4-3 in favor of the recommendation, but the board needs more than four votes to pass the measure.  Robbins is HART’s sixth leader in the past nine years.  Mayor Kirk Caldwell injected more uncertainty when he told the Federal Transit Authority on September 25^th that the City and County of Honolulu has decided to cancel the public-private partnership (P3) option to complete the project even though it is HART’s decision.  One of the companies competing for the P3 contract for the final four-mile leg of the project told investors that it bid more than $2 billion when HART has only budgeted $1.4 billion for the final segment.  Robbins told the HART board that the P3 procurement process was still underway the day before the mayor’s announcement.

 Oahu voters are apparently tired of the status quo.  Two first-time candidates, Rick Blangiardi and Keith Amemiya placed first and second in the wide-open mayoral race and will face each other in a runoff on November 3^rd.  The duo finished ahead of former U.S. Representative Colleen Hanabusa, City Councilwoman Kym Pine, and former Honolulu Mayor Mufi Hanneman.  This is the first time since 1980 that a candidate without personal elective office experience will be elected Honolulu mayor.

 The USS Arizona Memorial reopened on 9/28/2020 with a shorter program and at reduced capacity.  The 30-minute program offers a short orientation followed by a boat ride to and from the memorial.  The park is not currently showing the introductory movie prior to the boat ride out and visitors spend more time at the memorial itself.  Visitors are asked to reserve tickets ahead of time online and are available at 3:00 pm the day prior to planned tour’s start date and visitors are asked to arrive no sooner than 30 minutes before their scheduled tour.  There will be a limited number of tickets available for walk-ins.  Visitors must wear masks and the Navy boats will operate at 50% capacity.  The USS Bowfin Submarine Museum & Park, Battleship Missouri Memorial, and Pearl Harbor Aviation Museum are currently closed.

 The Thirty Meter Telescope (TMT) construction has been delayed until next summer at the earliest.  The global pandemic has lengthened planned construction preparation times to double and the weather inhibits construction during the winter months.  TMT recently reported that 80% of the subsystems have been built or are under construction.  TMT acknowledged that they have received the green light to begin construction on the Spanish Canary Island, La Palma, but stated that the project is still committed to Mauna Kea.  While the mostly Native Hawaiian protestors have grabbed the limelight, a group of pro-TMT Native Hawaiian activists are lobbying the project to commence building. 

 Scientists announced an upgrade to the W.M. Keck Observatory’s Keck II telescope using Adaptive Optics to remove blurring of astronomical images caused by atmospheric distortion.  The upgrade will allow the telescope to better detect cool, hard-to-see objects in space like exoplanets, protoplanets, and young dwarf stars.  The W.M. Keck Observatory consists of two telescopes with 10-meter primary mirrors and according to the website, are “the world’s most scientifically productive optical and infrared telescopes.  Scientific advancement on Maunakea even though the fate of the Thirty Meter Telescope is still in limbo.  The visitor gallery at the telescope facility is currently closed due to the pandemic restrictions.  You can visit the website, https://keckobservatory.org, for more information about the facility.

 Astronomers announced on October 1^st that they discovered a giant black hole surrounded by several young protogalaxies that date near the beginning of time.  A paper published in Astronomy & Astrophysics describes a campaign using the Keck II telescope, the Hubble Space Telescope, and several other of the most powerful telescopes in the world to discover and observe the black hole.  In related news, one of the three scientists awarded the 2020 Nobel Prize in physics is Professor Andrea Ghez who used the Keck Observatory to advance the understanding of black holes.

 Baby honu have started to hatch at Marine Base Training Area Bellows for the first time ever documented the training site.  The mother honu started showing up in April to lay their egg and there are at least thirteen nests.  The marines are monitoring twelve of the nests and four have begun to hatch.  One baby honu had to be rescued because it was heading in the wrong direction before people monitoring the nests discovered it.  The marines are keeping watch because honu nesting season goes through October.

 Conservationists will recapture the alala, Native Hawaiian crows, that were bred in captivity and successfully introduced back into the wild on the Big Island.  Dozens of the birds were released into the forests of the Puu Makaala Natural Area Reserve and successfully adapted to the wild foraging, calling, and attempting to breed.  The highly intelligent birds were once common on Hawaii Island, but their numbers declined to less than 100 by the 1960s due to habitat loss, invasive predators, and introduced diseases.  Ironically, the alala are being captured because several have been killed by the Hawaiian Hawk, or ‘io, that has also recovered in numbers due to conservation efforts.

 Tim & Tracey publish a monthly e-mail newsletter that provides more detailed local news with links to photos and videos.  Please e-mail Tim and Tracey at [email protected] if you would like to be added to the monthly newsletter.  You will continue to receive the mailed quarterly newsletter.

Odds & Ends

 State Renters Assistance:  Governor David Ige announced a new program to help tenants who are struggling or who have fallen behind on their rent due to the state COVID-19 economic shutdown.  Eligible renters are:

• Hawaii renters who are unemployed or partially unemployed due to the pandemic.
• Have an income less than 100% of the area median income.
  • Single Household - $88,200
  • Two-Person Household - $100,800
  • Three-Person Household - $113,400
  • Four-Person Household - $125,900
  • Visit https://www.hihousinghelp.com/#eligible for larger households.

 Rent payments can be as high as $2,000 per month and payments will go directly to the landlord and can be made in lump sum payments up to three months at a time.  Applications are being accepted for rent payments from August 1, 2020 through December 31, 2020.  The $100 million in initial funding is being provided by the CARES Act.  Money to cover rent from March 1^st will be provided in a second phase to be announce in the future.

 The Hawaii Rent Relief and Housing Assistance Program is available to:

• Hawaii Residents age 18 or older.
• Proof of valid and current tenancy for their primary residence in Hawaii.
• Can demonstrate a loss of income directly resulting from the COVID-19 pandemic.

More details are provided on www.hihousinghelp.com.  Tenants can apply online by visiting www.catholiccharitieshawaii.org or www.auw.org.  Tenants can also apply by calling 808-521-4357 if you do not have internet access.

 Tenants should contact their landlords directly for the necessary documentation need to apply for assistance.  Landlords should send this information to their tenants if they have fallen behind in rent due to a loss of income from the COVID-19 pandemic.

 Eviction Moratorium:  Actions by state and federal officials have highlighted an issue that investment property owners or aspiring investment property owners should pay attention to.  It is a disturbing trend of forcing landlords to kick the can down the road and then dealing with the possibility of a greater financial reckoning in the future.  The reasoning behind an eviction moratorium may seem humane at face value since government action has contributed to the COVID-19 pandemic’s economic disruption, yet it essentially places the financial burden on landlords.

 The U.S. Congress banned evictions in federally subsidized housing (houses with government secured loans) in March through the end of July.  Hawaii Governor David Ige quickly followed suit in March by suspending a landlord’s remedy of evicting a tenant for failing to pay rent or for failing to move by the deadline specified in a legally written notice-to-vacate order.  The Centers for Disease Control and Prevention (CDC) issued a sweeping ban on evictions that took place on Friday, September 4^th, banning all landlords from evicting tenants who claim they can’t afford to pay rent as a result of pandemic related reductions to their income through the end of the calendar year.

 The order does not absolve the tenant’s responsibility of owing the rent, it simply forces the landlord to provide an unsecured loan to the tenant for the unpaid rent.  Experienced landlords realize that charging rent and collecting rent are two separate activities.  Stott Property Management, LLC carefully tracks past due rent at all times (not just during the pandemic) and recommends that their clients consider eviction if a tenant falls more than one month behind in rent, fails to provide an acceptable payment plan, and/or stops responding to voice-mails, texts, and emails.  Experience has shown that the chances of successfully collecting the past due rent falls dramatically once a tenant falls more than a month behind in rent.  The only realistic relief for the landlord is the ability to take possession of the property and rent it to another willing and able tenant.

 There are some saying that the CDC order and state emergency actions are violating the U.S. Constitution’s takings clause.  In other words, the government has seized private property, at least temporarily, without providing the private property owner fair compensation.  According to an editorial by the Wall Street Journal, “about half of the 48 million rental units in the U.S. are owned by small businesses, many of which could be foreclosed on if they don’t pay their mortgages.”  Government forced shutdowns are wreaking havoc on small businesses during the pandemic, and this is just one more example.

 Until the state and federal restrictions on evictions are lifted or overturned by the courts, landlords have some decisions to make.  The CDC order still allows the landlord to charge late fees and interest spelled out by the lease or rental agreement.  Stott Property Management, LLC waived all late fees and interest through the spring and summer.  Now that the restrictions are becoming a major burden for some clients, Stott Property Management, LLC has started to charge late fees and interest on those tenants that refuse to respond and are not making efforts to seek the city and state rent assistance currently being offered.  There are a few tenants that will be evicted as soon as feasible due to their unwillingness to communicate or make any effort to pay rent.

 The CDC order does not prevent landlords for taking possession for other reasons.  Unfortunately, Governor Ige’s emergency order still prevents landlords from requiring tenants to move at the end of their lease even if the tenants are not experiencing any financial hardship.  This restriction was just recently extended until October 31, 2020.  Therefore, property owners may not move into their property or sell it unless the tenant voluntarily moves.  In a few cases, Stott Property Management, LLC’s clients were in desperate need of selling the investment property and we communicated this need to the tenants.  Fortunately, the tenants acknowledged the owners’ distress and voluntarily moved so that the owners could sell.  If you find yourself in this position, then opening the lines of communication may be your best option until the governor starts enforcing the laws again.  

 Hawaiian Hospitality Future:  Paul Brewbaker, a leading Hawaii economist, Frank Haas, an owner of a Hawaii consumer product branding company, and James Mak, a research fellow at the University of Hawaii Economic Research Organization (UHERO) published a research paper on the UHERO website about the future of travel and tourism and what that could mean for the Hawaiian hospitality market and the Hawaiian economy.  The authors analyze the post-9/11 travel industry recovery and compare those circumstances to the events currently unfolding as the nation struggles with the COVID-19 pandemic.

 During the months after 9/11, many Americans were initially hesitant to travel and many Americans initially avoided iconic attractions with large crowds because those sites were deemed most at risk for a terrorist attack.  The paper highlights “researchers have found that people make their travel decisions based on perceived risks rather than actual risks.”  The cause of the latest travel industry collapse is different and there are some similarities and differences that the report emphasizes.  Most Americans are currently uncomfortable with flying and the level of discomfort rises as the length of the trip increases.  That differs slightly from 2001 when flying on a major airline was the concern independent of trip length.  While international travel was initially discouraged in 2001, national borders were not closed like they currently are today.  Hawaii visitor accounts were still 98% lower in August due to the 14-day quarantine requirements for trans-Pacific flights.

 The authors note that working remotely is a viable option for many more people that originally thought as possible and working remotely is expected to triple even after the pandemic is over.  The risk and opportunity for Hawaii is that supply and demand may be mismatched for future travel.  The most glaring example is that experts expect high demand for vacation rentals, yet vacation rentals are prohibited in most neighborhoods on Oahu.  Demand for places that families and guests can stay, work, and play for longer periods of time may increase as working remotely has become widely adapted during the COVID-19 pandemic.  The City and County of Honolulu have promoted the development of Waikiki, Ko Olina, and Turtle Bay as tourist centric neighborhoods while prohibiting and aggressively trying to crack down on vacation rentals in residentially zoned neighborhoods.  The city’s Ordinance 19-18 passed in June 2019 made it illegal to advertise unpermitted rentals for stays less than thirty days while promising to approve approximately 1,700 bed and breakfast permits as a compromise.  The city council recently delayed implementation of the licensing program until the beginning of 2021 and the mayor has prohibited vacation rental operations in his COVID-19 emergency orders.

 While the current state of Hawaii’s tourism industry is currently bleak, the study may provide some opportunities to entrepreneurial property owners if the trio’s forecast proves true.  Furnished rentals with dedicated office space and with high speed internet service that has sufficient bandwidth to work remotely and video conference with colleagues could offer leases of 30 days or longer to families or groups of employees to work remotely while enjoying the natural beauty that Hawaii has to offer.  Bookings.com and Airbnb are capitalizing on the growing demand for “workations” by introducing longer stay rates (lower daily rates for longer stays).  The type of rental that will attract families or groups is different than the properties that will be licensed under Ordinance 19-18 where an owner-occupant will be allowed to rent two rooms in their home with a maximum number of four guests for stays under 30 days.  Therefore, the floorplans that support stays of 30 days or more will have to provide quiet spaces for people to work and children to attend classes remotely.  Tim and Tracey have spoken with clients that have come to visit their second homes for several months since they had to work from home and their children’s schools are not currently offering on-campus instruction.

 Only time will tell if the authors’ forecast comes true.  Hawaii’s tourism industry and economy will suffer if the state fails to effectively adjust to the changes to work, school, and travelers’ tastes that seem that have accelerated due to the COVID-19 pandemic.

 Must Have Amenities and Lease Terms:  One of Stott Property Management, LLCs primary responsibilities involves finding a new qualified tenant as quickly as feasible when a rental becomes vacant.  While property condition and location are important, another critical feature involves what a house or condo offers and what tenant preferences a landlord will allow.  A landlord can easily change these features in some cases and others may not be possible.  Therefore, choosing the correct investment property from the beginning is paramount.

 Must have amenities vary based on the region of the country your investment property resides and the type of renter you are looking to attract.  This article will focus on the most desirable traits for long-term rental properties (a lease greater than six months) on Oahu.  Most tenants today look for a rental that have at least one assigned off-street parking space (two is optimal for a two- or more-bedroom rental), stove, oven, refrigerator, dishwasher, washer/dryer, and air conditioning.  Air conditioning has become much more important over the past decade and it has a measurable impact on rents and vacancy rates.

 When it comes to lease terms, allowing pets has the greatest impact on rents and vacancy rates.  The landlord typically has the discretion when the rental property is a single-family home.  Investors targeting long-term tenants should verify that the association allows pets and the type and size of pets allowed.  Please note that if you refuse to allow pets, then it is better to buy a condo in an association that does not allow pets so that you minimize your competitive disadvantage.  Please also note that a tenant could still bring in a pet into the rental if they have a doctor’s note claiming that the pet is an emotional support animal.

 The list of must have amenities and lease terms is not a buffet of items that you can pick and choose from.  A rental missing one of the appliances, or one that does not allow pets, will turn off a significant percentage of potential renters.  While most rentals do offer a full kitchen and washer/dryer, many still lack air conditioning or prohibit pets.  Over the past three years, Stott Property Management, LLC has witnessed rental properties languish on the market because the client refuses to install air conditioning and/or allow pets.

 Someone Else’s Dirt is Worse:  Tim and Tracey have noticed a trend from years of managing and selling residential real estate.  Another person’s or family’s dirt is always far worse than your own.  We see the same pattern play out time and time again when tenants check in and out of properties, sellers get ready to put their homes on the market, and buyers do their final walkthroughs.

 A significant number of people are willing and able to look past their own dirt and messes for a variety of reasons.  They are tired, they have other more important things to do, or they just detest cleaning.  Over time, the dirt and mess just become part of the background and a level of complacency has come in.  Tim and Tracey experienced the extreme when they visited their sons rental house during his college graduation.  The odor of four college men that did not clean for eight months was like a punch in the face when walking through the front door.  Tim was not sure that his hands were any cleaner after washing them in the bathroom sink.  What happened.  Their son explained it this way.  He realized that the house was gross, but he was unwilling to clean up after the other three.  He currently lives on his own in Austin “recovering from the trauma.”  In many cases, it is just a matter of underestimating the time and energy it takes to finish a deep clean after moving.  One of the most common complaints that Stott Property Management, LLC receives is over a cleaning bill after the tenant checks out.  We hear that the tenants had cleaned for hours, we did not mention that the property was dirty during the checkout, or the rental was not that clean when they checked in.  Stott Property Management, LLC follows a detailed cleaning checklist every time during tenant checkout inspections and make ready cleans for a newly managed property or one that has been vacant for a while during make ready repairs.  One of our better cleaners recently noted that a house that was recently a vacation rental was “really dirty.”  The owner just did not see it.

 The opposite is true when a new tenant checks in, a buyer moves into their new home, or an owner moves back into a property that has been a rental for some time.  Someone else’s dirt is always far worse.  We receive complaints from time to time about some minor cleaning oversight and how gross it was, that the properties cleanliness was average, or more commonly how dirty the last tenant left the property when an owner moved back in.  Some of these complaints followed a recent make ready clean and ironically, Stott Property Management, LLC received complaints from the same owner when they started renting the property because we insisted on conducting a make ready clean prior to the first tenant checking in due to cleanliness issues.

 It has been our experience that it will take roughly eight hours to clean every surface (including windows and screens) in a two-bedroom apartment and up to sixteen hours for a large four-bedroom house.  A good house cleaner on Oahu charges $35 - $50 per hour and in our opinion, they are worth every dollar.  There is a large percentage of people who simply do not have the attention-to-detail nor do they know how to effectively clean.  Like anything, it is a skill.