By Siska S. Hutapea

Hutapea

Interest rate hikes have halted real estate transactions in Guam — between January to July 2022, monthly Guam real estate sales volume ranged from $51 million to $68 million, but the last two months of the year reflected volume of only $32 million to $33 million.

Total sales volume overall was at $598.8 million, which approximates to the 2021 level.

Looking closely, the 2021 volume included some delayed transactions from the 2020 pandemic year, so there was some increase in the activity.

The tourism industry was hit hard in 2022.

Unlike Hawaii, Guam did not have the domestic tourism (from the U.S. mainland) to sustain our tourism industry, as we rely heavily on the Korean and Japan markets. Some hotels benefitted from the military personnel or military construction-related activities, but revenue is nowhere near the pre-pandemic level.

Expenses, however, are increasing exponentially, especially energy costs.  It was hard to operate a business when revenue was down sharply, and expenses increased rampantly.

Labor issues also plague this industry from worker flight off island, to federal jobs, or to the comfort of public assistance. Moreover, the tourism product quality sees challenges. Gerald S.A. Perez, vice president of the Guam Visitors Bureau, noted at the Guam Chamber of Commerce’s Economic Forum on Jan. 12 that the tourism industry globally is shifting from a “marketing driven” to a “destination management” philosophy.  The bottom line — Perez stressed — is the need for our tourism industry to deliver the promised experience, products and services.  Although Korean tourism is coming back fast, these challenges are not easy to resolve.

The military construction activities have almost single handedly lifted Guam’s economy in 2022 and most likely will for the next five to 10 years. The number of construction workers increased by more than 67% to 9,700 as of March 2022 compared to March 2018; as opposed to a 5.8% decline in the private sector over the same period.

Areas of growth include the Route 3 vicinity near Marine Corps Base Camp Blaz and Route 15 near the new medical campus site, although the latter may lag a few years.

Commercial retail, especially food and beverage outlets, would be needed to support the Marine Base and several projects are in the pipeline. Housing developments are also going to be needed in this vicinity, not only to support Marine personnel (military and civilian) but also to support Air Force growth.  In our Economic Diversification meetings with Gov. Lourdes A. Leon Guerrero, she foresaw these economic opportunities and will work on spurring local business activities.  All three government branches will need to work closely together to help local businesses grow and provide necessary services from facility maintenance to personal services.

On a bright note, there are three large grocery-related stores that will open in 2023 in addition to the recent reopening of Micronesia Mall Pay-Less after undergoing a $4.5 million renovation. These are Happy Mart in Upper Tumon (with a much larger facility compared to its current location), American Grocery along Route 8, and the Japanese discount store Don Don Donki with its 270,000 square foot facility due to open in August 2023.

The Crowne Plaza Guam completed its $45 million renovation and reopened in November 2022. The Bayview Hotel under CoreTech International ownership now has the same management as the other two hotels owned by the company, the Dusit Thani Guam Resort and the Dusit Beach Resort. This is a smart and strategic move to elevate the otherwise non-oceanfront hotel and enables a wider target market.

The commercial real estate sector saw the impact of rising construction costs.  It is not logical, but cap rates have gone down while interest rates have increased.  Buyers, especially owner occupants, are willing to pay a higher price for existing properties as they realize construction costs are going to be astronomical.  Recent sales include the Harmon Manhattan Plaza, a two-story 28,000 square-foot building sold in June 2022 for $5.1 million, or $182 per square foot; an Asan two-story 10,800 square-foot building with metal roof sold in October 2022 for $1.7 million, or $157 per square foot; a Yigo two-story 9,447 square-foot commercial building sold in November 2022 for $1.9 million, or approximately $159 per square foot, excluding excess land.  Occupancy has also increased on quality properties but market rent is nowhere near feasibility rent that would justify new constructions.

The multi-family sector will continue to do well, as occupancy is expected to rise with the purchasing power diminishing due to interest rates hikes. There has been rumor in the market that the military’s Overseas Housing Allowance will be replaced with a Basic Allowance for Housing, which if true, would exacerbate the housing affordability for the local market. Various multi-family apartment projects are being proposed, but investors are looking for shovel ready projects with building permits in place. Similar to the commercial sector, the current market rent level does not justify new construction due to the high construction cost.  We have assisted some of our clients in preliminary value engineering to ensure feasibility of the projects.

The interest rate hikes can be seen as a much-needed pressure to put a lid on the price increases. Annually, the median prices of single-family dwelling in Guam have experienced double digit growth from 11% to 14% since 2018. The current median price reflects $420,000 for a single-family dwelling. In 2020, a monthly mortgage payment was $1,426 to buy a single-family dwelling at median price of $333,500. Due to the interest rate hikes, the mortgage payment is now $2,664 for the 2022 median price of $420,000.

Notable transactions in 2022 included 107 units sales at Ladera Towers in Mangilao priced from $286,000 to $635,000. Reportedly, the majority of the units are sold to investors from South Korea. Other transactions include the Monster Auto Corp. acquisition of the former Northwest Plaza at $7.0 million, Payless Markets acquisition of its future distribution center site in Barrigada, and Days Inn Tamuning’s acquisition by Tent Corp. at $4.7 million.  Eight single family dwellings above $1 million sold in 2020, including four between $1.9 million to $2.2 million.

Lending activity has decreased by 6% to $647.4 million in 2022 from $691.6 million in 2021. More telling than this is the number of transactions that went down from 1,865 in 2021 to 1,338 in 2022. Major lenders include First Hawaiian Bank and Bank of Guam, both at $118 million in volumes. NORCOM activities reduced significantly in 2022.  I spoke to one major lender recently who does not foresee tight money policy in Guam.

In 2023, Guam’s real estate activity will be determined by a mixture of our two economic pillars and cost-cutting measures across other industries. We are expecting more than $1 billion annually for military construction over the next few years in Guam, interest rates to stabilize, and tourism to bounce back. If these expectations are not met, as Gary Hiles — the Government of Guam’s chief economist — said at the forum when he quoted Mark Twain, “It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.”

Siska S. Hutapea is founder and president of Cornerstone Valuation Guam Inc. a real-estate valuation and advisory company. She also is co-chairwoman of Gov. Lourdes A. Leon Guerrero’s Economic Diversification Group and is a member of the board of directors of the Guam Chamber of Commerce and the Guam Economic Development Authority.