North Santa Barbara County Economic Outlook 2004
Reprinted from University of California at Santa Barbara Economic Forecast 2004. Written by Greg Stafford and Steve McCarty of Stafford-McCarty Commercial Real Estate.

Santa Maria, Strong Activity in Residential and Investment Real Estate
(Reported as of the First Quarter 2004)

Santa Maria markets are following last year’s patterns, with the exception that real estate continues to be more expensive.

• Housing market demand remains high and underpins economic vitality.
• Industrial vacancy approximately 7.5%.
• Planning for the future, the City proposed annexation east of Highway 101 of    approximately 2,000 acres of mixed use, known as the “Bradley Ranch”, and expansion on the west side of the City, known as Area 9 of approximately 850 acres of mostly industrial.

The following is a brief description of the market segments.

Approximately 648 single-family units were built and/or sold in 2003 compared to approximately 550 units absorbed in 2002. Similar or greater demand is anticipated for 2004. This is an increase of approximately 18% over 2002. 

The profile of Buyers for new residences is threefold: south county San Luis Obispo buyers moving down, south coast Santa Barbara buyers moving up, and local and retiree buyers moving in.  Entry-level homes continue to sell at all time highs in excess of $250 per square foot, $345,000 for newly constructed starter homes and townhouses of approximately 1,300 square feet.  Re-sales are within a similar price range. Orcutt entry-level housing is approximately $400,000 and northwestern Santa Maria is approximately $300,000 for approximately 1,500 and 1,200 square feet respectively.  Emerging is a trend of multiple families purchasing and occupying entry-level single-family homes.

Retail/Commercial
Since substantial build-out, occurring over of several years, the Crossroads power center development at Betteravia and US 101 (approximately 500,000 sq. ft.) there has been little anchored or general retail added to the city’s inventory.  In contrast, the auto dealers market segment has added significant single purpose square footage.  The following facilities are now operational.

• Saturn - 35,317 sq. ft.
• Santa Maria Nissan/Lincoln Mercury - 38,971 sq. ft.
• Community Volkswagon/BMW - 36,380 sq. ft.

Approximately 40,0000 square feet has been vacated from the Stephen’s Auto Center.  The future re-use of the property has yet to be determined.

The total amount of existing commercial/retail space within the City of Santa Maria (as of first quarter 2004) is approximately 3,960,000 sq. ft.  The only significant large retail vacant inventory in the city of Santa Maria is the so-called Home Base building (constructed 1989) of 96,875 sq. ft and the former Montgomery Ward space of approximately 70,000 sq. ft .  The former building continues to be vacant for over two years.  Alex Madonna, owner of the Montgomery Ward property, is contemplating alternative uses such as convention facilities and specialty retail by combining adjacent land to function in a manner similar to his Madonna Inn property in San Luis Obispo.

In the Orcutt area two shopping centers are continuing with governmental approvals, Orcutt Plaza (230,000 sq. ft.) and Orcutt Marketplace (109,600 sq. ft.).  Lowe’s Hardware and Von’s supermarket are the anticipated anchor tenants for the Orcutt Plaza project.

Shopping center sized parcels average about $10.00 per square foot.  General retail C2 zoned lots and smaller parcels, which are in very limited supply, can command $15 to $18 per square foot--this excludes anchored pads.

Office space for medical use is very limited.  Listed properties with medical build-out are virtually non-existent. Conversion of existing office space for medical use is unlikely as typical office product has less parking than what is required for medical uses.  Thus medical expansion is forced into new construction with higher rents associated therewith. 

Typically, expansion has been institutional or smaller owner/users versus speculative building .  However, this has recently changed as noted with the following projects demonstrating significant absorption:

• The Orion Building - 25,082 sq. ft.
• Fugate Business Complex on Miller Phase I - 19,664 of 65,000 sq. ft. (Phase II under construction)
• Professional Parkway - 28,424 sq. ft. in four buildings
• Pine Tree Plaza at the SWC of S. Broadway - 17,060 sq. ft.
• Betteravia Business Plaza - 30,000 sq. ft. (under construction)

Market rents for 2nd generation office space are typically $1.10/sq. ft. to $1.25/sq. ft. gross rent. Ever-increasing construction costs are driving rental rates upward for new construction buildings.  Rental rates for new office products have been achieved at $1.65/sq. ft./ NNN with an approximate $35 per square foot landlord contribution towards tenant improvements. 

Land prices are similar to the discussion in the Retail segment above, as Santa Maria’s C-2 zoning allows offices as well as retail, supporting valuations of approximately $10.00 sq. ft. with hard-to-find smaller lots demonstrating $15 to $18 per square foot values as well.

Stafford-McCarty databanks indicate that the industrial base for completed functioning inventory in Santa Maria at the time of this article is approximately 6,400,000 square feet.* Vacancy is 7.5%, representing approximately ­480,000 square feet, up from  6.72% for last year.

Incubator and small user demand for 4,000 square feet and under has been the primary demand.  Multi-tenant industrial projects offering smaller units have demonstrated slight absorption over 2003.  As an index to the market, Stafford-McCarty databanks show well-located buildings and units having had vacancy for 48 months.  Many of the well-located multi-tenant parks are demonstrating year-to-year vacancy factors of minimally 20% due to the larger units remaining un-leased.  Overall industrial employment has demonstrated flat to modest growth.

The following are vacated buildings/units, identified with the prior tenants, which have yet to be backfilled.  (Reportedly, there are lease transactions in process regarding some of these units.)

• Omnium Cycle Works - 34,000 sq. ft.
• Sunoco - 80,000 sq. ft.
• B.Allen Printing - 40,000 sq. ft.
• UPS Teleservices - 36,300 sq. ft.
• Valenzuela Engineering - 30,000 sq. ft.
• Former CBS Warehouse - 57,500 sq. ft.

From a visibility perspective, the most noticeable project continues to be the seven- building, 139,000+/- square foot FairSky Technology Park.  The desired occupancy for this project has been for larger office and R & D users, which have not materialized in the market as of date.   Four of the buildings are presently vacant, which comprise approximately 80,000 sq. ft.  

This being said, speculative industrial development continues with Meyer Asset Management, Phase II 70,076 sq. ft. (of a total 143,947 sq. ft.) and Enterprise Business Park Phase II, 34,905 sq. ft.

Key sale transactions:   

Asking rents for 2nd generation/re-occupancy multi-tenant buildings range from approximately $0.45 to $0.65 NNN.   New construction shell rates are approximately $0.65 NNN per square foot.

The mini-storage segment of the industrial market, thought to be oversupplied, remains strong.  Two projects were completed this year with approximately 141,000 s.f. of additional product still in planning.

The bulk of industrial land, zoned M-1 Light Industrial is controlled by the Santa Maria Airport District.  In this last year the District sold its remaining fee simple land, thus leaving land available for lease only.The District also is proposing an approximate 42-acre, Phase I, research  park, supporting approximately 500,000 sq. ft. of  build-out.  This project, leasehold interest only, is still under District review regarding design and CEQA mitigation issues.

In remedy to lack of supply of land for fee simple industrial product, property referred to as  “Robinson Helicopter” (120 acres of industrial land along Betteravia), is close to annexation.   To the west of the city is Annexation Area 9 (approx 850 acres bounded on the west by Black Road) with the largest stakeholders being oil companies (Unocal, Greka) and agricultural interests. The Area 9 annexation is scheduled for this year.

Agricultural
Farm land prices are in transition and have shown a steady increase in the Santa Maria Valley with a new established basis of $25,000 per acre for east side ground suitable for strawberry production.   

For comparative purposes, Santa Maria Valley continues to trail the Salinas Valley and Oxnard regions in land valuation.  In Oxnard a 324 acre ranch sold in excess of  $70,000 per acre.  The previous comparable was $53,000 per acre within the same year.  In the Salinas Valley valuations are in the mid to high $40,000 per acre.  Ground lease rates in Oxnard are surpassing Salinas.   Reported: growers seeking ground are offering $3,000/ acre rental rates.  As a comparison, Salinas Valley annual lease rates are $2,200-$2,400 per acre for quality ground, Santa Maria Valley, $1,200 -$1,400 per acre.  We expect to see a lockstep upward adjustment (Santa Maria seemingly undervalued) with these other agricultural communities. As one grower quipped, “You don’t think the phone lines are connected between Oxnard and Santa Maria?”

The anticipated reaction to the oversupply of grapes has evinced. Mondovi has sold 480 acres of its Sierra Madre Ranch and the 358 acre Gary Ranch.  Local Fess Parker Winery has sold off approximately 80 acres of older vineyards, which the buyer will convert to strawberry production.

Currently, capitalization rates for agricultural ground are approximately  4-5%.

Commercial Investment
This market segment has been the most dynamic.  Leased commercial properties have sold for never-before-seen low cap rates (translates into higher prices).  Even partially occupied properties have sold at incredibly low cap rates based on projected versus actual or contracted rents.  2003 saw considerable demand by exchange buyers looking for income producing properties who seemingly were prepared to pay top dollar to avoid the taxes associated with the relinquished property sale.  We believe there will be continued buyer demand for leased properties in 2004; however, we expect the demand to be less than what is was in 2003 as many buyers are electing to pay capital gain taxes versus overpaying for property as prices continue to escalate.

Examples of recent sales of leased industrial properties:

Softening or non-escalating rents and low capitalization rates typically do not go hand in hand.  There appears to be two different factors driving the market and operating independently of each other: 1) local users and market conditions are driving local market rents, and 2) a broader scope of investment buyers, not necessarily tied to regional constraints, are aggressively seeking income producing properties.

Shopping center, office and industrial capitalization rates are ranging between sevens and eights, with mid seven to eights being the target.   These rates have moved downward from the targeted nines reported in the 2003 report.

Santa Maria is similar to other investment markets in that there is little availability of product.  This condition also holds true for the balance of the Central Coast.

Summary
Santa Maria is securing its position as the epicenter for business growth in the Central Coast.  Evidence of speculative office and industrial development is a very positive sign for the Santa Maria market.  Investor confidence in the region, supported by sales transactions at lower cap rates, further demonstrates value and stability for the Santa Maria market. This coupled with a pro business environment and a municipal agency planning for and anticipating growth make this market a “watch spot” for the central coastal region of California.

* For the purpose of this report databank numbers include functional non-competitive inventory (older buildings and warehouses) and excludes non-market square footage such mini-storage, airport hangers, etc.