Of the eleven ahupua'a contained within the Ko‘olau-poko District, Kailua, like Kāne‘ohe, was historically among the most important. Early settlers took advantage of the area's rich food, water, and other natural resources. Primarily, however, Kailua was then a kalo-based agricultural area.

Undoubtedly further reasons for the attractiveness of Kailua as a place of residence for an ali&lsquoi nui with his large entourage were the great natural fishponds, Ka‘elepulu and Kawainui, and the complex of artificial salt-water ponds that are between Kailua and Kane`ohe in the Mōkapu area: Halelou, Nu‘upia, and Kaluapuhi. ⁽¹⁾

Kailua's water resources were developed in pre-contact times, with establishment of lo‘i kalo or taro field terraces, and associated irrigation systems. Such lo‘i kalo were inextricably linked with fishponds (see Hawaiian Fishponds). By late pre-contact times, Hawaiians had converted approximately 250 acres along the inland (mauka) edge of what was then a marsh-fringed lagoon at Kawai Nui, into a productive taro field. A 450-acre inland fishpond (loko wai) was also established at Kawai Nui, and was linked with the drainage system of a similar taro and fishpond complex at nearby Ka‘elepulu. Kawai Nui is the largest fresh-water marsh in the state. It contains a veritable treasure chest of archaeological and geological clues to the watershed's past.

For a period of about 100 years between 1850 and 1950, the Kailua ahupua‘a was a significant source of commercial agriculture, particularly for rice and sugar, as well as ranching. Activation of MCBH in 1952 (then as Marine Corps Air Station Kaneohe Bay or MCAS), combined with improved commuter routes to Honolulu, hastened Kailua's conversion from agriculture to urban use in the late 1950s. By that time, large areas along the Oneawa flood control channel that were formerly under cultivation had been developed and subdivided. Today, little agriculture remains in what is mostly an urbanized area. However, much of Maunawili Valley still retains a rural character.

The town of Kailua was built on a broad plain of ancient beach and dune sand. One of the town's most prevalent features is Kailua Beach, a long stretch of sandy shore fronting Kailua Bay. Backed by dune ridges and water-soaked sand flats, Kailua Beach averages about 100 ft (30 m) in width, although the shoreline position is highly variable. Due to erosion, particularly at the Lanikai end, beach replenishment has been an issue since the late 1970s.

Kailua's shallow groundwater table is responsible for major flooding that tends to occur during large storm events. The Kawai Nui Flood Control Project, completed in 1966 to move water from Kawai Nui Marsh to Kailua Bay, and the Ka‘elepulu Canal, originally built by early rice farmers to control water flow from the marsh to their pond fields, have eased flooding to some extent, although urbanization and associated creation of impervious, paved surfaces have created localized ponding problems. Kawai Nui Canal, the major outlet for Kawai Nui Marsh, flows at about 10 million gallons per day. This water originates from streams and springs that drain a large area of inland watershed (Maunawili) and about 1.35 mi2 (3.5 km2) of densely inhabited residential lands.

The mouth of Ka‘elepulu Canal, which drains the area known as Enchanted Lake, enters the coast of Kailua Bay at Kailua Beach Park, forming a large, brackish muliwai (a stream mouth isolated from the sea). A sand bar that helps the muliwai form is present during periods of low stream flow in Ka‘elepulu Canal. It is breached for short periods following periodic channel cleaning and by runoff flow diuring major storms.