San Luis Obispo County Economic Outlook 2003
Reprinted from University of California at Santa Barbara Economic Forecast 2003. Written by Greg Stafford and Steve McCarty of Stafford-McCarty Commercial Real Estate.

Santa Maria, Prepared for Growth on the Central Coast

Summary and key Issues underscoring Santa Maria market segments:

• Construction is ubiquitous across all market segments.
• Housing market demands remain strong and serves as the economic driver.
• Industrial vacancy increases nearly 2% from last year in Santa Maria.
• Planning for the future, City proposed annexation east of US 101, approximately 2,000 acres known as the “Bradley Ranch”.

There has been little or no growth in traditional industrial/commercial markets demonstrated by soft non-construction related employment in the North County. Yet in contrast, Santa Maria commercial project applications, in all phases, have increased approximately 36% from 1,800,000 square feet in year 2001 to 2002.  The following is a brief description of the market segments.

Residential Snapshot
The residential market is vibrant and is supporting larger and more costly homes.  Single family residential units are being absorbed as quickly as they can be produced. 

Approximately 580+ single family units for 2002 compared to approximately 550 units absorbed for 2001 with similar or greater demand projections for 2003. This is a slight increase over 2001, approximately 5.5%.  The builder’s sentiment: demand is present, production the bottleneck. 

Buyer profiles for new residences are split three ways: 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 are at an all time high, in excess of $170 per square foot,  $225,000 for the starter home/townhome. 

In addition the Santa Maria housing market is experiencing “space creep” as tract home sizes are increasing due to market demand.  Entry level homes several years ago may have been 1500 square feet compared with approximately 1,800 square feet offered today.  More “move ups” and larger homes (2,200 square feet and up) are being introduced into the market.

Retail
Santa Maria has had a steady flow of new commercial construction for the last fifteen years with an average rate of 127,246 sq. ft. per year.  However, the last three years has seen less than average rates of construction.  Total projects built in 2002 were 53,850 sq. ft.  The last year with significant construction was 1999 with 253,025 sq. ft. of space built.

The prospects for next year, also, appear to be less than average. The two largest projects currently in plan check are Community Volkswagen (26,080 sq. ft.) and Saturn of Santa Maria (20,151 sq. ft.).  The Pine Tree Plaza (46,750 sq. ft.) at the SWC of S. Broadway and Dal Porto should be completed by time of publication of this article.

The total amount of existing commercial/retail space within the City of Santa Maria (as of December 31, 2002) is approximately 3,823,000 sq. ft.  The only significant retail vacancy in the city of Santa Maria is the former Home Base building (constructed 1989) of 96,875 sq. ft.

In Orcutt there are two shopping centers currently undergoing governmental approval, Orcutt Plaza (230,000 sq. ft.) and Orcutt Marketplace (109,600 sq. ft.).  Lowes Hardware and Von’s supermarket are the anticipated anchor tenants for Orcutt Plaza.

Office
This market segment has shown a dramatic increase over past years.  The vast majority of office users are under 5,000 s.f. with the noticeable exception of government and education users.  The market base inventory is approximately 755,126 s.f.

Historically, Santa Maria’s office market demand has been modest. Expansion has typically been institutional or smaller owner/users versus speculative. 

Market rents are typically $1.10 to $1.25 gross rent.  Current market rental rates support  less than normal returns given reproduction costs.  This being said, Santa Maria presently shows expansion in this market segment.   The rental rates for new office products are being driven by new construction costs.  A look at this market segment next year will be telling to the depth and rent sensitivity for the office market in Santa Maria.

Noticeable projects completing and starting construction are:

• The Orion Building adding 25,082 s.f.
• Fugate Business Complex on Miller Phase I, 19,664 of 65,000 s.f.
• Professional Parkway 28,424 s.f. in four buildings
• Pine Tree Plaza, 17,060 s.f.
• Larger proposed projects:
• Betteravia Business Plaza, 30,000 s.f

Industrial
Stafford-McCarty databanks indicate the industrial base for functional inventory in Santa Maria at the time of this article is approximately 5,950,000 square feet.* Vacancy is 6.72% representing approximately 400,250 square feet up from slightly under 5% for last year. The increase  is due to corporate downsizing, completion of several speculative projects, sublease availability and the loss of companies.

User/buyer and investors have been the underpinning activity in the Santa Maria industrial market.

Primarily, the demand in the market has been incubator and small user market, 4,000 square feet and under. Multi-tenant industrial projects offering smaller units have demonstrated slight absorption over 2002,  As an index to the market, Stafford-McCarty databanks show well located buildings and units having had vacancy for 36 months.  Overall industrial employment has demonstrated flat to modest growth.

Industrial vacancy market notes:

• Companies creating vacancies:
  • Omnium Cyle Works, 34,000 s.f.
  • Sunoco, 80,000 s.f.
  • B.Allen Printing, 40,000 s.f.
  • UPS Teleservices, 36,300
• Companies driving occupancy:
  • New occupancy to the market, Cerox, 19,000 s.f.
  • Fess Parker Winery, 100,100 s.f.
  • Calply, 36,000 s.f.
• Continued expansion of local companies:
  • Central Coast Wine Services 53,000 s.f.
  • California Giant 63,000 s.f.
  • Denmat Corporation 35,000 s.f.

From a visibility perspective, the most noticeable project continues to be the seven- building, 139,000+/- square foot FairSky Technology  Park.  Four of the buildings are presently vacant, which comprise approximately 80,000 s.f.  This project located in the airport area, primarily provides product for larger office and R and D users.  

Key sale transactions have been:                                                       

• Water Wonders building, 100,700 s.f.,  $55 per square foot
• Santa Maria Chile building 100,100  s.f. , $47 per square foot
• Building #2 FairSky Technology Park, 20,300,  $75 per square foot

Asking rents for second generation/re-occupancy multi-tenant buildings are climbing 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 remains strong. Combined projects: 317,920 s.f. are in planning or under construction and continues to be the bulk of the speculative product.

Speculative industrial products under construction:

• Meyer Asset Management   73,871 s.f. of a total 143,947 s.f.
• McCoy Business Center, 40,497 sq multi-tenant project

Industrial Land
Land parcel sales have been active in 2002.  However, it has become increasingly difficult to find  finished lot product.  A recent transaction is the sale of approximately 40 acres transferred from a larger parcel and is planned for a smaller lot industrial subdivision. One to five acres sales, range from approximately $3.00 to $5.00 per square foot if they can be located.  Sales of six to twenty acres have been established at $100,000 per acre or approximately $2.30 per square foot. 

The bulk of industrial land resides in the Santa Maria airport area south of Betteravia commonly know as “the airport area”, however, this is mostly leasehold interest controlled by the Santa Maria Airport District. The first 40 acre phase of the Airport District’s 1095 Santa Maria Research Park is still on hold given mitigation measures regarding the Tiger Salamander and Red-legged Frog. Owners of the property referred to  as  “Robinson Helicopter” (120 acres of industrial fee land along Betteravia), have applied for annexation and await further mitigation studies

Agricultural
Vineyard and related support industries are in the spotlight as to their future. The local industry is working through oversupply issues. Meridian has been marketing 3,500 acres, recently placing approximately 400 acres under contract of sale. Prestigious Beringer Wines has removed from the drawing board an approximate 400,000 square foot operation proposed for the Santa Maria Valley, and elected not to renew their lease on  their 100,000 square foot facility it occupied in the Airport industrial area.  Partially backfilling the void of Beringer’s pull-out is Fess Parker’s winery operation which will occupy the former Santa Maria Chile building.

Farming land prices have shown a steady increase in the Santa Maria Valley with a new established basis of $22,500 per acre for quality ground. Santa Maria Valley continues to trail the Salinas Valley and Oxnard regions where valuations are in the mid to high $40,000 per acre. The eastern side of US 101 and has become the active area for strawberry production.  The emergence of a two tier agricultural land and lease valuation is being established, one for berries and the other for row crops.  Capitalization rates for agricultural ground have moved downward from 6-6.5% down to 4.5-5%.

Commercial Investment
Given the relatively modest expansion of the overall commercial market, Buyers are driving up prices for income property.  At face value this appears to be disconnected.  Investors provide plausible answers being a combination of stock market dissatisfaction, low interest rates and tax deferred exchanges pressures.

Shopping centers, office and industrial capitalization rates are ranging between sevens and eights, with nines being the target.   This is a half percentage point lower from the previous 2002 report. As a relative comparison, neighboring San Luis Obispo will attract mid sevens and Santa Barbara, mid to low sevens for a similar quality investment property.

Capitalization rates are being pressured to move downward from historically mid 9’s capitalization rates.  Recent MAI appraisals are typically using 8.5 capitalization rates for the income approach analysis in their appraisal work. 

There is a dearth of commercial investment inventory availability for sale.  Santa Maria is paralleling problems of other sought out investment markets in that there is little availability of product.

Summary
Real property investor confidence, evinced by the speculative building of office inventory is a very positive sign for the Santa Maria market. The professional service sector, which this market would address, has been noticeably absent until recently. Moreover, the region supporting transactions at lower cap rates demonstrates value and stability for the Santa Maria market. Santa Maria is securing its position as the epicenter for business growth in the Central Coast.

* 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.