Playing the real estate game in Guam

By Frank Whitman

Guam real estate transactions in the third quarter of 2023 totaled $116.3 million - nearly 15 percent less than total transactions during the same period the previous year. The drop is likely little surprise to anyone following financial news.

Siska Hutapea, president and founder of Cornerstone Valuation Guam Inc., included that information in a representation she released recently titled “Guam Real Estate Update: The Environment, The Game, and How Do You Play It.” According to Hutapea, the Guam real estate market is currently impacted primarily by rising interest rates, rising median prices, rising costs, limited supply and tedious permitting.

As recently as 2021, a 30-year fixed-rate mortgage could be had for as little as 3 percent. By Sept. 28, the rate had risen to 7.3 percent, making a real estate purchase significantly more expensive.

Siska Hutapea

“When the interest rate was at 3 percent, with a $2,500 monthly payment for principal and interest, you could buy a house at $600,000,” Hutapea told the Pacific Island Times. “But now, the interest rate is at 7 percent. With the same payment, you’re only going to be able to get a $300,000 house.”

According to Hutapea, the median price of a residence five years ago was about $269,450. It increased to $420,000 in 2022, though it dropped to $415,000 as of Sept. 28, 2023. “It’s down more because the buyer affordability is curbed because of the interest rate.

The cost of new construction on Guam has nearly doubled recently. A fast food outlet currently under construction in central Guam will cost about $879 per square foot. “This used to be like $400 for a really quality commercial space,” Hutapea said.

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The labor demands of contractors currently building $8 billion to $10 billion of facilities for the U.S. military in Guam have played a part in an ongoing scarcity of workers. “The most impact that the military did to us is the unavailability of contractors to build outside the gate,” she said. “They absorbed all the construction company capability.”

The limited number of properties for sale in the market—due in part to the impact of the military construction— also pushes prices upward, she noted.

The government of Guam has started streamlining its process for issuing building permits which can be inconsistent and tedious and often falls to understaffed departments with overlapping responsibilities.

The interpretation of the rules is seldom straightforward, she said. “It’s always ‘EPA interprets it like this; the contractor interprets it as this,’ That’s why the idea of having a concierge, someone who understands the whole process at Adelup to help speed up this process would be a really good idea.”

A task force to reform the permitting process, headed by Lt. Gov. Joshua Tenorio, has issued a request for proposals for a system to automate permitting. The RFP, however, is currently under protest in the government’s procurement quagmire.

To benefit from a purchase in today’s market, buyers will have to increase the income the property generates and/or reduce expenses, Hutapea said.

One way to generate more income from an existing property is to increase its value by renovating it, she said.

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Buyers might also benefit from a tax deferral under Internal Revenue Code Section 1031. An example of a “1031 exchange” would be if a buyer bought a property for $1.2 million and then resold it at $2.6 million. “So they technically made $1.4 million in capital gains,” Hutapea said. “You’re supposed to pay 20 percent out of that, which is $280,000. Instead of paying the tax, you could defer the sale and then buy another property, a like-kind property, and then you don’t have to pay the tax, it’s just deferred.”

Builders might reduce costs by “value engineering.” – cutting back where possible without sacrificing the quality of the product, such as reducing the size of a common area.

They might also consider a new method of construction, one recent example of which is the new Shell station on Route 15, she said. “Shell built the first modular service station. It looks really good; it was done quickly; it was done cheaper.”

Success in the “game” of real estate requires due diligence, a change in mindset and/or creative solutions, Hutapea said.

The first step in purchasing a property is having an expert perform thorough due diligence. “Check the flood zone,” she said. “Check the setback; check the wetland if there’s any; check the easement. Make sure you know everything there is to know about the property.”

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Challenging market conditions may require a change in mindset. Hutapea noted a couple of recent transactions as examples of a changing mindset. The former Hotel Santa Fe, a 100-room hotel in Tamuning, recently sold for $8 million. “The buyer transformed it to temporary worker housing,” she said. “They just got their permit. Now it’s available for lease.”

Perez Bros. sold its lot in Harmon for $6.75 million to Smithbridge Guam, which is using the lot as a precast yard, according to the company’s website.

Perez Bros., no longer in the construction industry, did a 1031 exchange and purchased Trophy Condominium in Yigo. The 14-unit property had been bought by a military contractor in 2021 for $1.89 million and then sold to Perez Bros. for $3.3 million. “They were only renting at $900 when they bought it in 2021,” Hutapea said. “Now the rent is at $2,000.”

Another creative solution in the real estate game is seller financing. With standard 30-year fixed interest rates at 7 to 8 percent, a buyer might ask the seller if he/she is willing to do, for example, 5 percent on a $5 million property. “If you do that what happens is yes, the sale price is $5 million but the present value - because the interest rate is only 5 percent - is only $4.3 million compared to the $5 million ticket price,” she said.

Outside the bases, significant development is taking place along Route 3 in Dededo and Yigo due to the construction of the new Marine Corps base and other facilities at Andersen Air Force Base.

Once the pace of military construction subsides, workers will be hired for facility maintenance, creating demand for development in the area.

There is also significant commercial development proposed along Route 15 in Mangilao/ Barrigada “because of the announcement of the medical complex activity there,” she said. The newest low-income housing tax-credit project is near the former Nimitz golf course, which is also in that area.

“The Route 3 area is the growth corridor right now along with Route 15,” she said.

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