North Santa Barbara County Economic Outlook 2002
Reprinted from University of California at Santa Barbara Economic Forecast 2002. Written by Greg Stafford and Steve McCarty of Stafford-McCarty Commercial Real Estate.

Santa Maria, What's Behind the "Boom" on the Rose?
Summary and key issues underscoring Santa Maria market segments:

• Housing markets outpace commercial markets in Santa Maria
• Increasing construction costs drive rental increases
• New demographics: migration of San Luis Obispo residents to Santa Maria

The region's commercial expansion pales when compared to the residential housing market. Residential units are being absorbed as quickly as they can be produced. Approximately 550+ single family units were absorbed for 2001 with similar or greater demand projected for 2002. The new demographic for Santa Maria is that many of the recent home buyers are from San Luis Obispo. Previously, San Luis Obispo residents have been reluctant to cross the County line and commute to job rich San Luis Obispo. Entry level home prices are at an all time high, in excess of $150 per square foot, $250,000 for a starter home. The associated businesses aligned with construction and home sales are doing well.

There has been little or flat growth in traditional industrial markets as determined by employment in the North County.

Santa Maria commercial project applications, in all phases, have increased 26.8% from 1,797,880 square feet in year 2001 to 2002. Continued buildout of permit applications filed is occurring across all lines of business. This growth activity is reviewed in the following market segments.

INDUSTRIAL AND INDUSTRIAL LAND
User expansion has been the underpinning activity in the Santa Maria industrial market.

The overall market is stable; vacancy is under 6%, increasing modestly from last year mainly due to the completion of several speculative projects and sublease availability. Primarily, the demand in the market has been the incubator and the smaller user market of approximately 5,000 square feet and under. Stafford-McCarty databanks show well located buildings and units having continuing vacancy now for 24 months. Overall industrial employment has demonstrated flat to modest growth, thus the housing market is not being supported by a Santa Maria industrial base.

Regarding speculative product, and thought to be a saturated market, mini storage (approx. 299,000 s.f. in planning) continues to be the leader.

From a visibility perspective, the most noticeable project is the 139,000 s.f. seven building complex, FairSky Technology Park. This project, located in the airport area, provides product for a large range of users as well as R and D. Four of the buildings have been recently completed with three buildings available for lease. An example of national corporation investment in the market is Sprint PCS. Their completion of 17,000 square feet along Betteravia bringing further telecommunications infrastructure to the market.

Asking rents for second generation/re-occupancy multi-tenant buildings are slowly climbing and are approximately $0.45 to $0.55 NNN. New construction shell rates are approximately $0.65 NNN per square foot per month.

Last year's recession and September 11th catastrophe did have an effect on Santa Maria. Several key tenants are awaiting venture funding to trigger occupancy and expansion. Major capital markets still view Santa Maria Valley as a build-to-suit market.

INDUSTRIAL LAND
End user parcel sales in the 1 to 5 acre range have been active over the last 24 months. Well located parcels are nearly non-existent. A recent improved industrial land transaction: M2 zoned parcel, approx. 3.31 acres selling for approx. $2.75 per square foot. Three dollars ($3.00) per square foot has been the rule of thumb for M1 Light Manufacturing zoned land over the years. Myers Asset Management proposeed a 13 lot subdivision and speculative building program along A Street. This project has been approved; the developer plans to start with five buildings from 8,500 - 15,000 s.f. Santa Maria values have stabilized and in some cases surpassed the market highs of the late 1980s, but has not enjoyed the higher base and increases South County, Santa Barbara County and San Luis Obispo have demonstrated.

The Santa Maria airport area south of Betteravia, commonly known as "the airport area", holds an approximate 30 year supply of zoned industrial land inventory. However this is mostly leasehold interest controlled by Santa Maria Airport District. The District desires to start Phase I, approximately 40 acres of an approximate 1095 acre project known as the Santa Maria Research Park. This project is at a standstill due to mitigation measures regarding the Tiger Salamander and Red-Legged Frog. Owners of 120 acres of industrial fee land along Betteravia have filed for annexation. This project is known as the Robinson annexation.

• Smaller industrial users will provide an excellent future base for Santa Maria as they expand.
• Well located industrial land parcels are becoming more scarce.

AGRICULTURAL
Vineyard and related support industries have taken center stage to the produce and berry growers as to their future. The fruition of projected oversupply has converted to a direct oversupply. Meridian is placing 3,500 acres on the market. Prestigious Beringer Wines has removed from its drawing board an approximate 400,000 square foot operation proposed for the Santa Maria Valley. Lompoc, Guadalupe and Santa Maria were all vying to capture this project. Moreover, Beringer has elected not to renew the 100,000 square foot facility it occupies in the airport industrial area. This should not go unnoticed as it was the wine industry that filled the large facility vacancies in the middle and late 1990s, specifically the former Arrow Automotive, CBS Records and Santa Maria Chile building, affecting approximately 250,000 s.f. of inventory collectively.

Farming land prices have shown a steady increase in Santa Maria Valley with a new established basis of $21,000 per acre for quality ground. Santa Maria Valley continues to trail the Salinas Valley and Oxnard regions in valuation with prices of $37,500 and $35,000 per acre, respectively. Strawberry growers have made a noticeable shift from the west of US 101 to the east. This has added tremendous value to farming lands on the east side which previously did not command prices comparable to the west side. Santa Maria is seeing an emergence of two tier agricultural land and lease valuation, one for berries $17,000 - $20,000 and the other for row crops, $12,000 to $21,000.

OFFICE
Santa Maria's office market remains soft as market rents continue to be below normal returns on continually increasing reproduction costs, yet, Santa Maria has seen modest expansion. Rents are typically $1.10 to $1.25/s.f./month gross. New construction has been primarily owner/user driven as opposed to speculative evinced by three local banks building offices from 4,000 to 7,500 s.f.

Noticeable exceptions however, are the Orion Professional Center at South College (part of the Crossroads Annexation) and the Country Club Professional Office Buildings adding 25,000 s.f. and 20,000 s.f. respectively, to the office inventory. Yet both of these projects have owner/user components. These developments continue the trend of Santa Maria's business district migrating to the south away from the traditional Main Street and Broadway core.

RETAIL
Over the last ten to twelve years this commercial market segment has performed steadily not only in Santa Maria but the whole Central Coast. The 500,000 square foot Crossroads power center featuring Home Depot and Walmart, Best Buy and TJ Maxx is completing its buildout. There are two Walgreen's drugstore developments: one at McCoy Lane and one on North Broadway of approximately 14,000 s.f. each. National tenants dominate the major square footage with regional following the anchors. Anticipated rejuvenation along South Broadway shopping centers is underway with a 58,000 s.f. Ralph's Food Co. retrofit in the Broadway Pavilion.

Between Orcutt, just outside the City limits at US 101 and the Santa Maria Way interchange, the approximate 220,000/230,000 s.f. Lowe's Home Improvement and Von's project is resubmitting for their EIR through the County of Santa Barbara. Developers are projecting entitlements within four months. Also in the County at the southern end of Orcutt at Clark and US 101, developer, Donahue Schriber, is processing through the County for an approximate 120,000 s.f. food/drug development.

As the Santa Maria investment market matures, renegotiated leases in are moving from gross rents to NNN.

More recent anchored centers are able to attract $1.15/s.f./month NNN and upward, from smaller tenants. Older centers are trying to maintain occupancy and negotiate the best rates they can.

COMMERCIAL INVESTMENT
This component of the market is very strong as investors are returning to the stability of "bricks and mortar" real estate and showing confidence in Santa Maria. Capiltalization rates have dropped a full point over our report last year. Shopping centers, office and industrial capitalization are ranging between sevens and low nines, with mid eights being the target. As a relative comparison, neighboring San Luis Obispo will attract mid to low sevens for a similar quality investment property. Santa Maria is experiencing the same problem of other sought out investment markets - in that there is little availability of product.

FINAL COMMENTS
All in all, Santa Maria is clearly poised to be the growth area of the Central Coast; their pro-business attitude and land availability position them for the future unlike any other community in the region. Santa Maria is demonstrating diversity of residential strata and stability in incubator industrial space which should grow and mature. Santa Maria is living up to its name as "The Best Business Address".