Reprinted from University of California at Santa Barbara Economic Forecast 2005. Written by Greg Stafford and Steve McCarty of Stafford-McCarty Commercial Real Estate.
Santa Maria – Prepared for Growth
Reported as of the First Quarter 2005
All market segments are demonstrating higher real estate values than last year. The City is preparing for growth by expanding its infrastructure capabilities and annexing land.
- Industrial vacancy has decreased from approximately 6.72 percent to 5.89 percent
- Planning for business and agricultural support industries, the City has annexed approximately 932 acres (Area 9) which is prezoned for industrial purposes and has expanded its wastewater treatment potential by acquiring over 230 acres.
- Housing market demand remains high and underpins economic vitality but is showing signs of softening.
The following is a brief description of the market segments. For the purpose of this report, databank numbers include functional, non-competitive inventory (older buildings and warehouses) and excludes non-market square footage such as mini-storage, airport hangers, etc.
The residential market is vibrant and is supporting larger and more costly homes. The trend continues, but it appears sales are slowing as prices continue to escalate. Residential land valuations have approached and in certain areas have surpassed commercial land prices. Recent sales of residential tract land have approached $11.00 per square feet.
Entry-level homes continue to sell at all time high prices of approximately $265 per square foot e.g., newly constructed starter homes and townhouses (1,300+/- square feet) sell for about $350,000. Re-sales are within a similar price range. Orcutt entry level housing is approximately $475,000 for 1,400+/- square feet, and northwestern Santa Maria is approximately $350,000 for 1,200+/- square feet.
Lenders say recent sales are highly leveraged with junior liens (second and third mortgages). There is a continuing trend of multiple families purchasing and occupying entry-level single-family homes. According to builders, the profile of buyers for new residences has changed in that local buyers trading up comprise approximately 50 percent of new homebuyers. In addition, a significant number of the new units are being purchased by investors as rental housing. By all accounts, the limited number of high-paying jobs being created in Santa Maria make it very difficult for workers to afford the average home price of approximately $450,000. This is being seen as a caution flag in our escalating market.
Existing commercial/retail space within the City of Santa Maria (as of first quarter 2005) is approximately 3,966,000 square feet. Since last year, the former Home Base building has been leased leaving 25,000 square feet available, and Club 24 has taken approximately half of the former Montgomery Ward’s building leaving approximately 30,000 square feet. These are the only large vacant retail space remaining within the city.
There has been little anchored or general retail space added to the city’s inventory in the last several years. Currently three sites are being evaluated for anchored center concepts – the vacant 40,000+/- square feet (former Stephen’s Auto Center) at Skyway & Broadway, the SWC of McCoy and Broadway, and the SWC of La Brea and Blosser.
In the Orcutt area, two shopping centers, Orcutt Plaza (230,000 square feet) and Orcutt Marketplace (109,600 square feet), are still awaiting approvals. The Orcutt Plaza, with Lowe’s as an anticipated anchor, has been held up with mitigation issues concerning water.
Shopping center-sized land parcels now exceed $10.00 per square foot. Prices can be expected to be $15.00+/- square feet, if the land can be located. General retail C2 zoned lots and smaller parcels, which are in very limited supply, can command prices of $18 to $25 per square foot. This excludes anchored pads.
This market segment is the most visible with construction occurring along the heavily traveled corridors. The vast majority of office users continue to be less than 5,000 square feet with the noticeable exception of government and education users, which often require larger spaces. The market base inventory is approximately 865,000 square feet, which has shown only modest growth (about 2.4 percent) from last year, however, significant inventory for this relatively small market segment is coming on line. Higher end product may become an oversupply situation and we view this market as “watch and see”. The following are significant office projects in the city:
- La Brea Plaza: 700 Block of East Main, 29,587 square feet in two buildings, under construction
- Betteravia Business Plaza: NEC Betteravia and Miller, 31,016 square feet, 70 percent preleased, nearing completion
- Fugate Business Complex: 201 S. Miller, Phase I, 19,664 square feet, and Phase II, 18,003 square feet of 65,000 square feet (both phases have been completed and occupied)
Office space for medical use is still 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.
Market rents for 2nd generation office space are typically $1.10 per square foot to $1.25 per square foot gross. Ever-increasing construction costs are driving rental rates upward for new buildings. Rental rates for new office products have reached $1.75 per square foot NNN with $35+/- tenant improvement allowances.
Land prices are similar to the discussion in the Retail segment above, as Santa Maria’s C-2 zoning allows office uses as well as retail uses. Land prices are increasing to $15.00 to $20.00 per square foot, and hard-to-find smaller lots costing $18 to $25 per square foot. This price range has moved up from last year’s $10.00 to $15.00 per square foot.
User/buyers and investors continue to be the mainstay for activity in the Santa Maria industrial market.
Stafford-McCarty databanks indicate that the industrial base for completed, functioning inventory in Santa Maria at the time of this article is approximately 6,750,000 square feet Vacancy is 5.89 percent, representing approximately -397,500 square feet, down from 6.72 percent for last year.
The typical industrial requirement has been 4,000+/- square feet, which is coming from tenants looking for incubator space and other small users. Multi-tenant industrial projects offering smaller units have demonstrated greater absorption than last year. Conversely, Stafford- McCarty databanks show several well-located buildings, with units of over 10,000 square feet, having had vacancies for over 36 months. Overall industrial employment has demonstrated fl at to modest growth.
The following are vacated buildings/units, identified with the prior tenants, which have yet to be backfilled. (Reportedly, as of this writing, there are lease and potential sale transactions in process regarding some of these units.)
- B. Allen Printing, 40,000 sq. ft.
- UPS Teleservices, 36,300 sq. ft.
- Valenzuela Engineering 30,000 sq. ft. (This building has been purchased and divided into smaller units.)
From a visibility perspective, the most noticeable project continues to be the seven- building, 139,000+/- square feet 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. Over 50 percent of the park is vacant which is approximately 62,000 square feet. Multiple buildings in the Park were sold in 2004 to investors. There are plans to subdivide the approximate 20,000 square feet buildings into industrial condominiums for the smaller user/buyers present in the market. Escrow transaction valuations for these products are in the mid-$90s per square foot.
This being said, speculative industrial development continues with Meyer Asset Management, Phase II 70,076 square feet (of a total 143,947 square feet) and Enterprise Business Park Phase II, 34,905 square feet. Both projects have been completed.
Below are new building sale figures of the new Meyer Asset Management project
|2240 A Street||11,113 sq. ft.||$95.74||user/buyer|
|2390 A Street||11,848 sq. ft.||$93.18||user/buyer|
Asking rents for 2nd generation multi-tenant buildings range from approximately $0.45 per square foot to $0.65 per square foot NNN. New construction shell rates are approximately $0.65 per square foot NNN.
Mini storage continues to surprise us, as this market, thought to be overbuilt, remains strong. Additional product is in planning stages.
What was once found in abundance is now scarce, but this will soon change. It has become increasingly difficult to find finished lot product. One to seven acre sale prices range from approximately $3.00 to $7.50 per square foot, if they can be located. M2 PD land sales of six to twenty acres have sold for $120,000 per acre or approximately $2.75 per square foot for land with partial infrastructure availability.
The Airport District, which controls the bulk of the M-1 Light Industrial zoned land, is proposing an approximate 42-acre, Phase I, research park of approximately 500,000 square feet. A portion of the project has been approved with 15-20 lots, leasehold interest only, and the balance is still under District review regarding design and CEQA mitigation issues.
The remedy for lack of industrial fee land is the imminent annexation of Area 9 (approximately 932 acres west of A Street between Santa Maria Valley Railroad to the north and Betteravia Road to the south), and the so-called “Robinson Helicopter” property (120 acres of industrial land along Betteravia Road). The largest landowners are oil companies (Union Oil, Greka) and agricultural interests.
Several key transactions indicating upward movement in industrial land values for well located property along Betteravia Road:
- Consolidated Lumber Property: 7.19 acres of PD-CM zoned land, $6.71/sq. ft.
- Former Santa Barbara Research: 16 acres of PD-M1 zoned land, $5.16/sq. ft.
Farmland prices continue to be in transition. They have literally leapfrogged in valuation. This has been demonstrated with the Buss property 130-acre sale at $43,200 per acre. Previous new high water marks were $25,000 to $30,000 per acre. Sales have occurred on both the east and west sides of Santa Maria.
For comparative purposes, Oxnard demonstrates values in the $65,000 to $70,000 per acre range. In the Salinas Valley, valuations are in the mid to high $50,000 per acre. Ground lease rates in Oxnard are surpassing Salinas. Reportedly, owners are seeking $3,000-3,500 per acre rental rates. As a comparison, Salinas Valley annual lease rates are $2,200-$2,400 per acre for quality ground. In the Santa Maria Valley, annual lease rates are $1,200-$1,500 per acre.
A recent vineyard sale, Fess Parker sold approximately 213 acres of vineyard known as the Ashley Vineyard, demonstrated valuations for the production portions of approximately $35,000 an acre (still in escrow as of this reporting).
Currently, capitalization rates for agricultural ground are ranging approximately 4 to 6 percent.
Shopping center, Office and Industrial capitalization rates are ranging between 7 and 8, with mid 7’s being the median. This is down approximate 0.5 cap rate from last year. A Cap Rate (Capitalization Rate) is calculated by dividing the annual net operating income (NOI—which does not include debt service) by the purchase price. For example: $100,000 NOI/$1,500,000 purchase price equals .0667 or a 6.67 cap rate.
We are seeing a change in current investor psychology. General confidences of increased valuations of investment properties seem to outweigh investors attention to rental cash fl ow. Softening rents or non-escalating rents and low capitalization rates typically do not go hand-in-hand. Even partially occupied properties have sold at incredibly low cap rates based on projected versus actual or contracted rents. In this way, we see commercial markets tracking similarly to residential markets – income returns are not driving the market, but it appears that anticipated valuation growth is.
In 2004, we saw considerable demand by exchange buyers in the Central Coast regions. We anticipated there would be a lessening of demand for leased properties as cap rates continue to drop, which has happened, but prices have continued to rise. There will be continued buyer demand for leased properties in 2005; however, we expect the demand to be less than what it was in 2004 and 2003 as many buyers are electing to pay capital gain taxes versus overpaying for property as prices continue to escalate.
Examples of mid 7 cap rate transactions between $2.5 million and $3.5 million for Santa Maria:
- 2801 Santa Maria Way Multi-tenant Office $3,150,000 17,000 sq. ft. 7.8 Cap Rate User/Buyer
- 1234 Fairway Multi-tenant Industrial/Office $2,850,000 20,100 sq. ft. 7.5 Cap Rate Investor (escrow)
Santa Maria continues to be 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.
Santa Maria is establishing itself as the hub of population and business for the Central Coast by annexing land and developing infrastructure. Santa Maria is the only city in the Central Coast producing any significant quantity of housing stock.
Transactions supporting increased valuations demonstrate confidence in the region and stability for the Santa Maria market. Santa Maria remains the “watch spot” for the central coastal region of California.