Hawaii’s booming construction industry — one of the main drivers of the state’s economy — appears to be nearing the peak of its cycle and will begin to grow at a slower pace beginning in 2018.

Single-family home and condominium prices, which have risen this year to record levels, also will moderate, according to an annual construction forecast set for release today by the University of Hawaii Economic Research Organization.

Deteriorating home affordability, rising construction costs and an expected increase in interest rates ultimately will precipitate the next industry downturn, UHERO said in its report.

UHERO said jobs and income are now growing at double-digit rates, but added that those gains will be much smaller going forward. While there are still new projects breaking ground, they will be offset by existing projects coming to completion.

The report said construction jobs, which will hit 38,800 this year — a 10.9 percent increase over 35,000 in 2015 — will rise just 1.7 percent in peaking at 39,500 statewide next year before slipping 1.1 percent in 2018 and falling an additional 1.4 percent in 2019.

“Activity will begin to fall off by 2018 as the surge in resort and condo building wanes, costs for builders and home buyers mount, and global economic conditions become less favorable,” UHERO said in the report, which was spearheaded by Executive Director Carl Bonham, senior research fellow Byron Gangnes and economist Peter Fuleky.

Rising construction costs have been a challenge in Hawaii for developers who have endured a labor shortage caused by the ramp-up of condominium towers in Kakaako and ongoing Honolulu rail construction. In the first half of this year, 5,000 construction jobs were added statewide — a 14 percent increase over the year-earlier period — as the newest wave of major developments added to a high volume of existing projects, according to UHERO.

Construction remains strong as it climbs to its peak with activity on the neighbor islands just now picking up, UHERO said.

High-rises in the Kakaako and Ala Moana areas continue to ascend, and new-home construction is beginning to shift westward to single-family development at Hoopili, which broke ground earlier this month, and Koa Ridge, which is expected to begin construction next year. Commercial construction also has been relatively strong, driven by resort-related development, according to UHERO.

But retail building may slow with the completion of work at Ala Moana Center, Waikiki’s International Market Place and the first phase of the Ka Makana Alii shopping center in Kapolei, the report said.

On the residential front, the price of single-family homes and condos on Oahu is forecast to rise about 6 to 7 percent both this year and in 2017 before tapering off by the end of the decade, according to UHERO.

The organization is projecting a 6 percent increase in single-family home prices this year to a median $739,700, followed by a 6 percent gain to $783,700 in 2017, a 3.9 percent rise to $814,100 in 2018 and a 0.9 percent increase to $821,200 in 2019. For condos, UHERO is forecasting the median price to rise 7.2 percent this year to $388,300, increase 6.9 percent to $414,900 in 2017, gain 5.6 percent to $438,400 in 2018 and increase 3.3 percent to $452,900 in 2019.

“Home price gains have been limited despite tight inventory, quick sales times, and lack of new home building,” UHERO said. “This may be explained by anemic income growth, restrictive lending standards, and still-elevated foreclosure levels, especially on the neighbor islands.”

UHERO said the inflation-adjusted value of government construction contracts hit a 10-year high last year due to improvements to harbors, airports and waste treatment facilities but that the value of those contracts will drop off a bit in 2017.

“Honolulu rail rapid transit remains on shaky financial ground, with uncertainty about the source of the new revenues that will be needed to take the project to its completion at Ala Moana Center,” UHERO said.

HAWAII CONSTRUCTION FORECAST

Source: University of Hawaii Economic Research Organization