Last year in this article, I wrote about the consensus view that 2016 was going to be a breakout year for the economy across the board, with strong tourism numbers looking to carry over from 2015 and the signing of the Record of Decision on Aug. 29, 2015. The long anticipated relocation of 5,000 Marines from Okinawa Prefecture to Guam was set to begin. It looked last year that contracts would start to hit in the fourth quarter of 2015, with significant numbers being awarded in the second half of 2016. One source told us total military contracts could reach $800 million within the next 12 to 18 months.
Well, the tourism numbers did not disappoint as Guam is heading for a record number of visitors to the island in fiscal 2016 with our neighbors to the north in Saipan racking up records of their own. The strong tourism numbers carried over into strong employment numbers and consumer spending with accommodations and amusement compensation anticipated to continue to rise from their all-time high of $737 million reached in 2014, according to the Bureau of Economic Analysis with the U.S. Department of Commerce.
However, the Marines buildup has yet to get underway in any major fashion. This time, the delay was not finances or protests on location; this time it was due to concerns brought about by the Federal Wildlife Service regarding endangered species on the Finegayan site of the new Marines base. The good news, according to those we spoke to in the industry, is that once proper mitigation is complete, that project should resume activity by first quarter 2017, and while the delay has frustrated many, we were told that starting the project only to have it shut down by Fish and Wildlife after it had been started would have been worse.
While I am reticent to put this in writing — because I have written this more than once over the years — we believe the buildup is coming for real this time. You can feel it in the preparation activity on island.
Yet even without the anticipated push from military construction tied to the buildup, it appears from talking to participating businesses from our survey that the economy will continue to grow in 2016 over 2015’s record GDP of $5.16 billion. Albeit due to the delayed buildup construction, it will most likely grow at a similar demure rate seen in 2015 of .40% (2014’s $5.143 billion). The growth in the economy reflected increases in consumer spending, exports of services, which consist primarily of tourist spending, and federal (non-buildup) spending. These increases were partly offset by a decrease in private fixed investment as Guam Regional Medical City (Guam’s new private hospital) and the Dusit Thani hotel (Guam’s first new hotel in 10 years) were completed in 2015, according to the Bureau of Economic Analysis.
This is not to say there is nothing new in the private sector. The private sector is investing in new projects and reinvesting in existing businesses on a smaller scale to keep up with the ever more sophisticated Guam consumer. For proof of this, you only have to look in the Guam Premier Outlets area of Tamuning, where CAM5 Real Estate broke ground on the second phase of the Camacho Landmark Center. Down San Antonio Road, we saw complete renovations of King’s and Wendy’s restaurants and new investments in Pieology, IHOP and Boston Pizza.
Several of Guam’s leading organizations have broken or are set to break ground on new headquarters to include Docomo’s complete renovation of the former Ben Franklin building in Tamuning, Coast360’s new branch in Upper Tumon across from GTA, Staywell Insurance’s new building in Maite and the Guam Chamber of Commerce’s new facility in Hagåtña.
In the retail space, Macy’s is undergoing its fourth expansion since opening in Guam in 2001 with the addition of 45,000 square feet of retail space (bringing its total to 200,000 square feet when complete), and Ross will open its second Guam store comprised of 27,000 square feet. Both projects are in the Micronesia Mall. Meanwhile, Pay-Less Supermarkets has invested in an impressive new look with more than $20 million in renovations, new locations and new warehouse facilities across its stores island wide, according to the company
The biggest private sector investment underway is Ken Corp.’s new $150 million, 26-story, five-star luxury Tsubaki Tower next to the Nikko Hotel in Tumon. This will be Guam’s second five-star hotel to be built in Tumon in the last 10 years following the Dusit Thani completed last year and will move Guam closer to GVB’s Vision 2020 goal to make Guam “a world-class, first-tier resort destination of choice for two million business and leisure visitors from across the region with accommodations and activities ranging from value to five-star luxury.”
The two key points to this vision are two million visitors and becoming a first-tier resort destination. To accomplish this, the island needed approximately 1,600 new rooms when the goal launched in 2015, and existing hotels need to upgrade their facilities. With the Tsubaki Tower, the Dusit Thani and the Lotte Hotel renovations, this goal is 60% complete. And there are several more hotels in different levels of planning to include the Citta di Mare project, a $133 million hotel comprised of four towers ranging from 13 to 18 stories with 500 total rooms on the hillside of Tumon.
However, it is not just construction that has seen increased private sector activity. Through September, Guam has seen in excess of $400 million worth of real estate sales (a 25% increase over the whole of 2015), to include the ITC building, Windward Hills Golf Course and Evergreen Phoenix Resort’s $34 million purchase of 50,475 square meters of land next to the Hyatt Regency in Tumon.
Locally, the government of Guam is attempting to complete contracting (currently under protest) for the renovation of several Department of Education schools to include Simon Sanchez High School. The contract, said to be worth up to $100 million, is one of the biggest Government of Guam contracts to be let in years.
GWA completed the borrowing of $143.3 million and received an additional $50 million plus commitment from the federal government for needed capital improvement to the existing water and wastewater systems, while the A.B. Won Pat International Airport, Guam has an active RFP open for a major renovation of its terminal to allow visitor isolation for incoming and outgoing passengers.
Additionally, the University of Guam has entered into an agreement with the U.S. Department of Agriculture for a $21.7 million loan. The loan is going to the UOG Endowment Foundation on behalf of the university to enable two separate historic projects to get off the ground. The UOG Student Center will be expanded and renovated into a Student Services Center that will serve as a one-stop shop by fully integrating vital services into one facility. In addition, the university will build the School of Engineering Annex adjacent to the existing Agriculture and Life Sciences building, which houses the College of Natural and Applied Sciences in a second building phase in the near future.
While volume remained steady at the pumps, and GPA’s power production issues have required realignment in the type of fuel brought to the island (more expensive fuel), the reduced price of global crude prices has acted as an increase in pay for Guam’s consumers. By my calculations, consumers spent more than $100 million less last year on fuel costs to include both the pump and for power. This, along with more timely tax refunds and increased wages in most sectors of the economy, resulted in increased consumer spending across the board to include spending in restaurants, entertainment, local retail, as well as on big-ticket items, such as homes and automobiles.
According to Siska S. Hutapea, president of Cornerstone Valuation Guam Inc., the median selling price for a standalone house on Guam reached a record of $250,000 in 2016, which is a 13% increase from last year’s median price of $221,500 and more than double the price seen 10 years ago. Condominium prices also increased, albeit at a much lower rate of 4% ($179,000 from $172,500 a year ago).
New automobile sales increased from 6,760 units year-to-date in September 2015 to 6,836 units year-to-date in September 2016, a 1.1% increase year over year.
What is even more encouraging is that while consumer spending has increased, bank deposits are up and delinquencies are trending down. All in all, I got the impression that Guam’s consumers are in a better place than they have been in more than a decade, which bodes well for future consumer spending.
Northern Mariana Islands activity
Whenever the Northern Mariana Islands came up in discussions, talk quickly turned to Best Sunshine. Best Sunshine is a subsidiary of Imperial Pacific International (CNMI) LLC, an indirect wholly-owned subsidiary of Imperial Pacific International Holdings Ltd., an investment holding company headquarted in Hong Kong. It holds the exclusive casino resort developer license for Saipan as of August 2014 and has operated a temporary training casino since July 2015 built within the DFS T Galleria complex as it works toward the 2017 opening of an integrated casino resort, Imperial Pacific Resort, in Garapan.
In the first six months of business, Best Sunshine made a major impression as it hired 1,307 employees and generated $514 million in revenue, making it the highest grossing business in the region — and this was using its training facility. Think about the activity when its permanent facilities open.
This sort of growth in such a short period of time obviously has both upsides and downsides to the economy. The NMI economy needed a boost — and it certainly has received it with more visitors, increased auto sales, new land and development activity, more jobs and higher tax revenue for the government. However, this sort of demand has led to inflationary pressures on housing, shipping and competitive wages for other businesses on the island.
Looking ahead, these are certainly exciting times for the NMI economy, but it will not be without its growing pains.
Base Operating Support Services contract
DZSP 21 LLC was awarded a $39.7 million cost-plus-award-fee contract with award options for base operating support services at Joint Region Marianas on Sept. 29, according to a news release. The maximum dollar value, including the base period, four option periods, three award option periods and a six-month services extension, is about $491.9 million. Work is expected to be completed by March 2025, the release stated. The contract is a re-award as a result of corrective action taken due to a Government Accountability Office protest.
This contract is very important for the entire community, on base and off, as it both supports the critical missions of Guam’s bases and creates well over 1,000 well-paying private sector jobs once you count the subcontracting work tied to the contract. While the contract sat in limbo, many long-term capital programs had to be put off due to the uncertainty. The freeing up of this contract should be another driver for the economy in 2017, and everyone in the community should hope that there is not another protest.
Tourism had another strong year. Through the first 11 months of fiscal 2016, Guam welcomed more than 1.37 million tourists (10% increase year-over-year). According to the Guam Visitors Bureau, three of the 10 best months on record based on visitor arrivals occurred in fiscal 2016: December 2015 was the eighth best month on record with 132,418 visitors, February set a record at the time with 142,332 visitors and August outdid February becoming the best month on record with 144,600 visitors. With these numbers, Guam is on track to reach a new record of 1.5 million tourists by the end of the year.
Within the numbers, there were encouraging trends for our largest market, Japan, with a 7.7% increase in arrivals for the month of August (79,342) helped by additional seat capacity from charter flights out of Narita and Nagoya from China Airlines and Uzbekistan Airways. Korea remains strong, up 9.8% in August and 36.5% for the year (475,245).
Guam has a highly competitive telecom sector and is one of the most connected fixed broadband networks in the United States as well as strong mobile penetration to include nine major submarine cable networks. While the region has fallen behind the mainland in speed, the top three providers are spending significant resources to change this paradigm by increasing investment in fiber and infrastructure so that the region is ready not just for the Marines buildup, but also the new digital economy to include telemedicine. These projects have not only increased speed for consumers, but have created hundreds of new jobs the last two years.
While Guam’s economy is steady and the buildup is finally in sight, there are four major issues facing Guam that, if not handled correctly, could put a major dampener on the growth of the economy: H-2B visas, federal overtime rules, local minimum wage hikes and reliable power.
H-2B visa issue
While the Marines buildup appears to be a “go” with construction set to begin early next year, the question is, are we going to have the skilled labor pool necessary to do the job? Both Guam’s health care and construction industries rely heavily on H-2B workers, and while there was a national hiring cap for H-2B workers in the mainland, Guam had previously been exempted.
In 2015 the U.S. Citizenship and Immigration Services approved 98% of H-2B visa applications and extensions filed on Guam. Since January of this year, USCIS has denied nearly 100% of Guam’s requests. If this trend continues, Guam could be down to less than 100 H-2B visa holders by the end of the year (down from about 2,000 in mid 2015).
The good news is that Madeleine Z. Bordallo, Guam’s delegate to Congress, introduced language into the 2017 defense spending bill that passed the house earlier this year, to include language for the continued hiring of H-2B workers for Guam’s medical and construction industry. Those familiar with the matter are hopeful that the logjam will break at USCIS by the first quarter of 2017. One thing is for certain: both the buildup and our medical communities will be challenged without these workers.
Earlier this year, the U.S. Department of Labor updated its regulations on overtime pay for salaried workers to include Guam. Currently employees making more than $23,660 a year could be exempt from overtime if they oversaw certain management functions. The new rules almost double the threshold to $47,476. This new regulation will require many of Guam’s businesses and especially the hospitality industry, which relies heavily on workers in this category, to make adjustments to their staffing practices.
If the U.S. DOL overtime rule change is not enough of an issue facing Guam’s businesses, the Guam Legislature is considering Bill 312-33, which would raise the minimum wage from $8.25 to $9.20 on Jan. 1, 2017, an 11.5% increase, and to $10.10 by January 2018, another 9.8% increase. If this bill passes, the increase in minimum wage would be on top of Public Law 32-178 passed in 2015 that raised the minimum wage from $7.25 to $8.25, a 13.8% increase.
While the Guam business economy supports its employees, wants to make sure they are properly compensated and understands the minimum wage should be periodically increased to cover
inflation, the proposed increases, if passed, would result in an increase in minimum wages of almost 40% over a three-year span. Unless I missed it and we have turned into the Weimar Republic of 1914, there is very little inflationary data to justify even a 10% increase over this amount of time and certainly not a 40% increase.
The fourth headwind is the issue of electrical power. At the end of August 2015, an explosion ripped through the Cabras 3 and 4 power plants. Without Cabras 3 and 4, the Guam Power Authority has the capacity to generate 275 megawatts of power. To augment production, GPA contracted with Aggreko for $11.7 million a year to rent a temporary mobile power plant until such time that the power authority has the excess capacity needed to assure a steady stream of power to its customers.
However, what we have learned in recent months is that power production is still very shaky and all it takes to put significant portions of the island into 1991-style load shedding is one of the existing base loads to go down. This is not a healthy environment and not a recipe for success in an economy that is going to need more power capacity in the years to come. The community needs to come together and put pressure on GPA to come up with a long-term solution for our power needs in a timely manner or Guam’s economic growth will be hampered in the future.
Last year, everyone we spoke to was bullish on where their companies were headed. This year, while being a little bit more reserved in their predictions, almost everyone we spoke to was confident the buildup is underway, tourism continues to grow and the economy is set for steady improvement over the next several years.
Further, we walked away with the impression that company balance sheets were as strong as they have been in decades, which should bode well for new investments and improvements within current businesses.