Evaluating the Hawaii Land Market

Gauging real estate investment potential in Hawaii hinges substantially on macro land market conditions shaping the islands. With roughly 1.47 million acres currently dedicated toward agricultural uses like tropical crop cultivation or cattle grazing per the Hawaii Department of Agriculture’s latest data, the state needs to optimize a finite inventory of land to simultaneously feed residents, service tourism and preserve ecological heritage across limited ground. Monitoring trends around agricultural zoned land transactions and pricing helps benchmark market reception balancing these competing interests. 

While development speculation has pushed per-acre sales values considerably for some vacant parcels in resort areas, most large agricultural tract sales in Hawaii averaged around $7,400 per acre during 2020. Comparing data year-over-year and tracking the volume of sales provides critical clues around market liquidity as well that inform buyers’ pursuits and sellers’ expectations. Though land itself remains stationary, attaching appropriate price tags accounting for these fluctuating dynamics calls for diligent, consistent inspection by those looking to enter Hawaii’s distinctive property investment landscape.

Overview of the Hawaii Real Estate Market

Hawaii has historically had a strong real estate market driven by tourism, the military presence on Oahu, and overall desirability of the islands. Home prices steadily rose through the 1990s and 2000s until hitting a peak in 2006. When the housing bubble burst nationwide, Hawaii was impacted as well. Prices contracted through 2011, but the market has since recovered and even surpassed pre-recession levels in many areas.

Overall demand remains high, especially on Oahu where Honolulu and beachfront communities drive prices. There is limited available land for new construction, keeping supply constrained. However, the market varies considerably between the different islands and even towns and neighborhoods. Understanding these local dynamics is key for buyers and investors.

Factors that Impact Hawaii Land Values

Many considerations go into properly evaluating a land parcel or property in Hawaii. Key factors include:

Location - As with most real estate, location is paramount in Hawaii. Coastal properties on Oahu or Maui in desirable communities will sell for a premium. In contrast, inland parcels on less populated islands will sell for substantially less. Even on the same island, values can vary widely between resort areas and more rural locales.

Zoning Regulations - Each island and municipality have its own zoning laws which dictate what can be built on a parcel. Areas zoned for single family homes will be worth more than agricultural or conservation land. However, zoned land that cannot be developed further due to lack of infrastructure may actually sell for less.

Accessibility - How easy is it to access the land? Parcels near major highways and roads will typically be more valuable than remote plots only reached via small, rural roads. Easements may also impact value if the access route crosses neighboring land.

Utility Connections - Is electric service readily available nearby? How about telephone, cable, internet, water and sewer? Parcels already connected to utilities or located near existing infrastructure will sell for more. Running long utility connections gets expensive.

Permitting Requirements - The permitting process in Hawaii can be arduous. Some parcels may not allow further development at all. Understanding what construction is allowed before purchase is essential.

Size - Within a given area, larger parcels typically sell for more per square foot than smaller plots. This is due to perceived value, but also costs to develop - constructing a road or installing utilities scales with size.

Views - For residential sites, view impacts value. Parcels with ocean views or scenic vistas sell for a premium over those without. Good views raise property values.

Surrounding Land Use - Is the parcel within or adjacent to existing neighborhoods, commercial zones or resorts? This typically raises value by association, whereas remote parcels surrounded just by undeveloped land will be harder to monetize.

Access to Amenities - Proximity to beaches, shopping, restaurants, trails and other area amenities will increase a parcel's appeal. People pay more for land close to features they find desirable.

School District - Strangely enough, while Hawaii frequently ranks low in school quality nationwide, parcels zoned for top districts still command higher prices for families looking to buy into those zones.

The Development Potential

A key factor in land valuation is the development potential or “highest and best use.” What realistically can be built on the site and how does that impact value?

For residential land, potential options include:

• Single family housing
• Duplexes or townhomes
• Condominiums
• Apartment buildings

Zoning will dictate which options are feasible. Additionally, parcel size, shape and terrain will determine capacity. A one acre steeply sloped lot may only fit one single family home, whereas ten acres of flat land could support dozens of townhomes.

For commercial parcels, there are also a range of uses with differing values:

• Retail stores and shopping centers
• Restaurants and hospitality
• Office space
• Industrial facilities and warehouses
• Hotels and resorts

Understanding these variables is key to determining fair pricing based on development potential.

Demand and Market Conditions

The real estate market fluctuates greatly, and demand in one location or segment may be completely different than another. Tracking sales activity and pricing trends across the islands provides crucial insights.

There are some common patterns:

• Oahu, and Honolulu specifically, has the highest demand and prices due to jobs and population density.
• Neighbor islands with tourism see cyclical demand spikes and seasonality. Spring and summer are peak seasons.
• The Big Island's vacation rental market has grown exponentially thanks to volcano tourism.
• New luxury condo towers continue to rise in hot spots like Waikiki and Ka'anapali, aimed at affluent buyers.
• Slower markets exist on Moloka'i and Lānaʻi given minimal tourism and development.

Staying abreast of the latest projects, sales data and market shifts will help time purchase and sales decisions optimally. What’s booming now may cool in a few years.

Typical Buyers and Common Uses

Understanding the likely buyers and uses for a parcel also provides perspective on appropriate pricing:

Second Home Buyers - The Hawaiian islands are a top destination for vacation homes and investment properties. These span from modest condos to luxury estates. Pricing must account for second home premiums typical buyers pay.

Developers - Given Hawaii’s constrained housing inventory, developers purchase land for master planned communities, condominiums and apartments. Their residual land valuation models help them determine pricing.

Commercial Operators - Those looking for office, retail, restaurant and other commercial sites have another set of metrics for feasibility. Hospitality operators in particular pay premiums for properties suitable for their needs.

Farmers & Ranchers - Large agricultural parcels exist, primarily on the Big Island and Kauai. Valuations here depend on soil quality, water access and other factors very specific to farming & ranching.

Conservation Groups - Some buyers aim to preserve Hawaii’s natural beauty by purchasing land and prohibiting development. Valuations of these eco-sensitive parcels are driven by different goals.

Each buyer type utilizes different assumptions and motivations in assessing fair pricing for a property. Sellers must align expectations accordingly.

Approaches to Land Valuation

Now that we’ve covered the key factors that drive land values in Hawaii, let’s examine some ways to quantify and estimate pricing:

Comparable Sales - This approach looks at recent sales of similar nearby parcels to gauge value. The land must be truly comparable - size, zoning, utilities, etc. This method is simplest for homogeneous suburban subdivisions.

Income Capitalization - Commercial land can be valued by estimating the annual income potential, capitalizing it into perpetuity, and discounting future cash flows to present value. This approach projects value based on earning potential.

Cost Analysis - For land being developed, deducting total projected development costs from potential sales revenue indicates what price the raw land could support. This method helps developers appraise feasibility.

Percentage of Improved Value - For vacant land suitable for single home construction, value can be estimated as a percentage (often 25% - 35%) of the future home’s value. This technique provides a quick estimate based on potential.

Each method has pros and cons, and often multiple approaches are combined to triangulate a reasonable value estimate. Appraisals also factor in recent sales of comparable properties.

Maximizing Returns Through Holding or Improving

For investors or developers who purchase land in Hawaii, there are also strategic ways to maximize returns besides just buying and flipping:

Hold for Appreciation - Given high demand and constrained supply, land values in Hawaii have consistently increased over time. Simply holding land as an inflation hedge or for long-term gains can pay off well.

Add Value Through Entitlements - Obtaining key permits, zoning changes and approvals can significantly boost land value prior to selling. This “entitlement process” requires expertise but creates substantial added value.

Install Infrastructure - Having roads, utilities, grading completed and other infrastructure in place also raises land value compared to raw acreage. This further derisks the parcel for buyers and Developers.

Subdivide for Incremental Sales - For larger parcels, consider master planning and subdividing into smaller lots. These can be sold individually over time, generating higher cumulative pricing than selling the entire parcel upfront.

Strategic Partnerships - Joining forces with Developers, contractors, hospitality brands and other strategic partners on a land development can maximize sales potential and returns.

Final Thoughts

The Hawaii real estate market holds great potential, but also many nuances. Valuing land appropriately requires deep understanding of the property specifics, zoning, demand factors and buyer motivations. While incredibly beautiful, the Hawaiian Islands are one of the most complex property markets to navigate. Engaging experienced advisors and brokers who know the islands is key to successfully buying or selling land there.

With proper guidance, a detailed valuation approach, local market knowledge and strategic positioning, land can be monetized at full market value. However, it is critical to have accurate assumptions and reasonable expectations when establishing an asking or purchase price. By following the guidance above, both buyers and sellers can transact with confidence and maximize returns on Hawaii land deals.

Frequently Asked Questions (FAQs)

What areas of Hawaii generally have the most valuable land?

Land values are typically highest on Oahu, especially in Honolulu and the surrounding coastal communities. Resort areas on Maui, Kauai, and the Big Island also command premium pricing for land.

How much does the view impact land value in Hawaii?

View is one of the most important factors for residential land pricing in Hawaii. An ocean view can double property values or more compared to parcels without views. Even scenic mountain or valley views command a significant premium over less picturesque inland lots.

Should I get an independent appraisal done on land I’m considering buying in Hawaii?

It is highly recommended to get an independent appraisal by a licensed professional. Hawaii's market is complex and factors like zoning, development potential and lack of comparables require local expertise to value accurately. Don't rely solely on seller claims.

I'm selling my land in Hawaii - should I subdivide it first to maximize value?

Potentially. For larger parcels, going through the subdivision process to create smaller lots can generate substantially higher cumulative sale prices than selling the entire acreage at once. But this requires time and expertise. Consult experienced local brokers to determine if subdividing makes sense.

How much can I expect land values to appreciate long-term if I hold rather than developing now?

Appreciation varies greatly by area and market conditions, but Hawaii has seen steady land value growth between 4-8% annually over decades. Holding strategic parcels for later sale or development can pay off handsomely over time as demand rises and supply stays tight.

‍