San Luis Obispo 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.

What a Difference A Year Makes - Dramatic
In regards to commercial real estate, business confidence has subsided in San Luis Obispo County not unlike the rest of the country. Presently, user demand is modest, at best.

Ironically, with evidence of deals falling through and the business confidence waning there is little actual vacancy change over last year. Notwithstanding the confidence pall, overall vacancies remain estimated at less than 5% - lower in the City of San Luis Obispo. Coming from a past market of high confidence our present market has yet to adjust to the major economic forces within the last twelve months, i.e., the stock market devaluation and the World Trade Center tragedy. This is in sharp contrast to the dramatic changes in the Bay Area real estate market following the first of these two events. As our county market is a market of submarkets, the economics break out differently for each community and type of commercial property. Below are descriptions of market segments and how they are acting as a composite of San Luis Obispo County's economic makeup.

INDUSTRIAL
Industrial land prices in San Luis Obispo have stabilized after nearly doubling over the last few years. An acre of improved industrial land averages $8 - $10 per square foot.

Land in the North and South County still has not seen such appreciation. Industrial land prices in the North County are near the late 1980's valuations. An acre of industrial land in Paso Robles is approximately $3.00+ per s.f. with on-site improvements. As there is limited supply in South County, in-fill parcels still range in the $4.00 to $8.00 s.f., depending upon location and availability.

Paso Robles currently has available multi-tenant and freestanding inventory. New multi-tenant space with a modest buildout is approximately $0.55 s.f. gross rent per month.

MEDICAL AND COMMERCIAL OFFICE/R & D
Reimbursement policies of managed care continue to change how and where medical space is utilized. Approximately 40,000 square feet has recently been constructed and absorbed in the 5 Cities region versus San Luis Obispo where space has not been produced. New private pay practices, i.e., surgery centers are creating new demand.

Real estate options for medical care providers requiring 3,000 s.f. and greater are very limited. Space must be greatly modified to meet new requirements. San Luis County General Hospital's equivocal politics regarding closing or sustaining operations creates demand uncertainty in a presently tight occupancy market.

The expanding high-tech jobs seeking Research and Development (R and D) buildings have been impacted from two sides: one, the scaleback of high-tech jobs and two, the speculative (spec) buildings being developed are mostly C-S zoned space - suitable for R and D but not suitable for traditional market office users.

Speculative projects that were getting started about a year ago are now completing at an unfavorable time to be securing tenants. As projected, several of the approximately 1,500,000 s.f. building projects approved in the immediate San Luis Obispo area over the last several years have been constructed, e.g., Aerovista Business Park (approx. 85,000 s.f. of approx. 183,000 s.f.), Quaglino 64,000 s.f. and Weyrich, approx. 43,000 s.f. R and D new construction. Rents are projected at $1.10 to $1.80 s.f. NNN/month depending upon the quality of build-out.

Complicating build-out inventory analysis (and excluding resource rich Paso Robles for the sake of this discussion), it remains questionable how much square footage can actually be constructed in San Luis Obispo County within the City. Traditional mitigation methods of water retrofit techniques (saving water by replacing inefficient usage - shower heads, toilets, etc.) are being exhausted, thus making an already difficult development process more so. Add uncertain user demands, and it makes development a double-bind status.

AGRICULTURE
Wineries are common topic of conversation and continue to enhance our region's desirability. This year vineyard production has exceeded demand. Edna Valley grapes which typically sell at a premium have had difficulty finding buyers. Yet, vineyard production sales surpass any singular vegetable crop for the top spot at approximately $135 million per year.

Permits with large square footages are making their way through the building department. One of the most visible from hwy. 101 is Courtside Cellars, having recently completed 180,000 s.f., a portion of a permitted 400,000 s.f. crush, bottling and storage facility in San Miguel. This 25,000 ton facility is a larger counterpart to their existing 80,000 s.f. facility in the Edna Valley. These specialty facilities are critical to their operations, yet cannot be added to the functional industrial base. The generally remote locations and restrictive alternative uses governed by the Ag zoning result in limited utility for general employment.

RETAIL
During the last year, San Luis Obispo County has seen ubiquitous development of big box retailers. Atascadero and San Luis Obispo (nearing completion) now have Home Depots. Paso Robles has added an Orchard Supply Hardware; Costco has plans to build in San Luis Obispo. Paso Robles has the Woodland Phase III entitled and ready to go. A large proposed 510,000 sq. ft. retail development in San Luis Obispo, the Marketplace (Lowe's, Target, Penny's), continues to be a future possibility. These projects draw great public scrutiny and trigger many articles in the Opinion section of the local papers.

In contrast, the dormant Copeland's extensive downtown development (200,00+/- sq. ft.) plan has been well received by the public in its conceptual form and is reported to be resurfacing.

It appears that the amount of retail development is in excess of minimum population industry standards required to profitably justify these new stores in the county.

With the continued growth of big box retailers, a concomitant reduction in sales can be expected for the existing independent retailers.

RESIDENTIAL
The residential component seeming to level off, is still a very active segment of the market. The County is experiencing strong inward migration. With the City of San Luis Obispo as the epicenter, housing prices become more affordable at the northern and southern parts of the county. Homes in San Luis Obispo and ocean view units in Pismo Beach have sold in the range of $250 to $400 per s.f. At the southern edges of the county and the Nipomo area prices are approximately $115-125 per s.f. for entry level product. Paso Robles has maintained increases in valuation moving toward $150 per square foot for new construction. Paso Robles has the greatest land inventory to accommodate housing and is steadily absorbing approximately 300 units per year in the region.

Excluding Paso Robles, residential unit permits continue to hover around the County's 2.3% growth cap. Central Coast home builders are presently selling all they can build. Builders lament their sales are being limited as they cannot produce the homes as quickly as they would like given our labor market and sub-contractor base. Will housing demand hold? Home sales in Southern California have historically been a good index foreshadowing the Central Coast market. Builders are looking over the fence.

Contrary to last year's ballot defeat of an initiative designed to limit rezoning of agricultural land, (the SOAR Initiative; Save Open Space and Agricultural Resources) anti-growth sentiment is very strong.

TELECOMMUNICATIONS INFRASTRUCTURE
Great expectations have been associated with the installation of telecom infrastructure. Last year witnessed a great deal of excitement by area developers and building owners with the fiber optic telecommunications boom. A number of the major players rushed into the area such as Level 3, Global Crossing, Williams Communications, Qwest and others. Now, it is all quiet on the telecommunications front. Significant ancillary transactions anticipated have yet to materialize, given the tremendous infrastructure investment which has already been committed to this region.

SUMMARY
The composite of the above elements show inevitable trends indicating the character of the County is under transition. The commercial real estate climate summarized last year as "one of comfort" is certainly one of uncertainty regarding commercial R and D. This is interesting as the bulk of the vacancy is in the new inventory. Small offices are virtually non-existent throughout the County. Exchange buyers have been abundant. Capitalization rates have been moving downward. However, it has become nearly impossible for exchangers to locate good quality income properties at any price range. The population continues to steadily increase; the number of jobs continue to increase with very low unemployment (recently reported to be the lowest in the State - even given it's downturns), and demand for housing, especially entry level, continues to build. Therefore, the prices of homes has reached an all time high this year. Stafford-McCarty referred to SLO County in last years article as being a "Best Kept Secret" which now should include the word "expensive". As the present theme is market uncertainty, it shall indeed be of interest to revisit our forecast next year and again see "what a difference a year makes".