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Noozhawk: UC Santa Barbara Economic Forecast Project Takes a Walk Along State Street

March 04, 2021

The COVID-19 pandemic has brought a lot of change to the corridor, including the shift to outdoor dining and an increase in vacant retail properties

Santa Barbara, California – Published 3/4/2021
By Jade Martinez-Pogue, Noozhawk Staff Writer
Santa Barbara’s State Street features outdoor dining patios and parklets, products of the COVID-19 pandemic. (Jade Martinez-Pogue / Noozhawk photo)

The COVID-19 pandemic has brought many dramatic changes, one being the emergence of outdoor dining patios and parklets that now characterize Santa Barbara’s bustling State Street.

While local restaurants have been able to adjust and adapt to the ever-changing COVID-19 guidelines and restrictions, many retail storefronts along State Street have been left empty and up for lease.

The UC Santa Barbara Economic Forecast Project hosted a panel Thursday, taking viewers on a walk along State Street to look at just how much has changed during the course of the pandemic.

The waterfront area that makes up the first couple blocks of State Street has remained fairly healthy during the pandemic, according to Gene Deering, principal at Radius Group Commercial Real Estate Inc., crediting the development of the Hotel Californian and building out to create smaller retail spaces along the street.

When the pandemic first hit in March 2020, the hotel made the difficult decision to suspend operations for most of the property, with the exception of the Goat Tree Restaurant, in order to help slow the spread of the virus.

“We realized that we need to do our part to flatten the curve and to help reduce the spread of this oncoming pandemic,” said Warren Nocon, managing director of the hotel.

The first closure lasted about 10 weeks before the hotel reopened in June 2020. Once the hotel was back up and running, the summer season was relatively successful, and Nocon attributed the success to the closure of State Street and the opening of the promenade.

Seeing all the excitement around outdoor dining, the Hotel Californian and neighboring properties started to develop outdoor dining themselves.

“It really worked; it was nice to see the entire Funk Zone as a community really treat the pandemic as something serious,” Nocon said.

When cases started to surge again in the fall and winter months, the Hotel Californian decided to suspend its operations once again in mid-December, a closure that lasted about eight weeks. The hotel is now back open and has been working with the city and the Santa Barbara County Public Health Department to make sure that things are going in the right direction to work toward a full reopening, Nocon said.

Despite the success of the Hotel Californian, the pandemic has had adverse effects on sales at Finney’s Crafthouse and Kitchen at 35 State St., according to Brad Finefrock from Finney’s. Sales have been down in the past six to nine months, but the development of outdoor dining has combated the adverse effects and made the Funk Zone an “exciting and desirable destination,” he said.

Finefrock said he hopes that the Santa Barbara City Council embraces outdoor dining and parklets for the future in perpetuity because it is difficult for operators to invest in outdoor dining structures unless they know that there is going to be a more long-term approach to outdoor dining.

“The pandemic and the closure has affected people differently. There are winners and losers here,” said Peter Rupert, executive director of the Economic Forecast Project. “We have to be very careful to make sure that the decisions we make are doing the best we can for everyone.”

Deering added: “These retailers need to make decisions and spend money, and they want to know that the goalpost isn’t going to move on them.”

The smaller retail spaces on the first few blocks of State Street are some of the most desirable right now and have some of the highest lease rates in Santa Barbara, Deering said. Buildings between 800 and 1,500 square feet are averaging about $7 per square foot, he added.

The Fish Enterprise building, at 225 State St., sold twice in the past 18 months and was last sold for $3.5 million, or about $6 per square foot, according to Deering. The previous retail space will become office space.

Moving farther along State Street, there are improvements to be made for the underpass between Montecito and Gutierrez streets, Rupert said.

“The tunnel is super narrow, dark, damp and smelly,” he said. “To me, this is something that doesn’t give us a very good welcoming to those that are walking toward State Street from the beach.”

The American Institute of Architects 2020 Design Charette for a reimagined State Street provided many inventive and aesthetic ways to beautify that portion of State Street that the city could look into implementing, Rupert said.

“We just need a better place for Instagram, we need a better spot for selfies when you’re walking up,” said Kristen Miller, president and CEO of the Santa Barbara South Coast Chamber of Commerce.

Deering suggested changing the underpass from four lanes to two to reduce traffic and expand the walkways.

“Hopefully this is addressed quickly, because it’s a weakness we have,” he said.

Just outside the underpass, the Casa Blanca building, at 330 State St., sold a few months ago for $6.3 million, Deering said.

Coming up on the 400 block of State Street, there is a clear contrast between that block and the 500 block of State Street, as the 500 block is closed to vehicle traffic and the 400 block is not. Many store owners on the 400 block have asked the city to close that block to traffic as well, Rupert said, but the city would have to try to figure out how to get emergency vehicles down the street to Cabrillo Boulevard.

Peter Lewis, who owns the Cost Plus World Market building on State Street, is working to build 84 residential units behind the old Staples building on the block, Deering said.

Moving to State and Haley streets, through traffic is stopped and the restaurant scene is flourishing with outdoor patios and dining parklets.

“Oh, how lively this block is! This new State Street is fun; it’s exciting to have good news and positive momentum on State Street,” Deering said. “The outdoor patios are full; there’s a lot of energy down there. It’s what you want in your main downtown thoroughfare.”

Family-owned and operated Institution Ale, at 516 State St., took a risk in signing its lease two years ago, according to co-owner Shaun Smith. Now, the brewing company is in the process of opening a 5,000-square-foot beer garden in the open space next door.

“It’s been difficult, and we’ve just been treading water hoping to get to the end of this,” Smith said. “But we’ve benefited from adjusting and changing our business plan. We’ve seen some uptick in business thanks to the opening up of State Street and the closure of that through traffic.”

Smith said he hopes that outdoor dining can be a more permanent solution post-pandemic to bring more people to State Street.

“Even though the outdoor dining experience kind of came due to the pandemic, I think customers really enjoy that and they don’t see that as a negative,” he added.

However, many of the retailers outside of restaurants and bars have lost visibility because of the new parklets and outdoor dining set-ups, Rupert said.

The old three-story Scientology building on the 500 block of State Street sold last year for $5.7 million and will be turned into a boutique hotel, Deering said.

The 600 block serves as another stark contrast to the lively 500 block with a lack of restaurants and a movie theater that’s not operating, Deering said, adding that developers are looking at ways to try to activate that area of the street.

“There’s a big difference coming from a block where there were a lot of restaurants and bars to this one, where there aren’t many parklets and it’s very dull; there aren’t too many people, or activity,” Rupert said.

It’s a great opportunity to add some outdoor amenities, Miller echoed. The chamber of commerce is working on implementing an economic development program that is focused on State Street solutions and recruiting businesses in a variety of categories, she added.

Three storefront leases were just completed on the 600 block of State Street, Deering said.

The space next to 7/11 on the 700 block of State Street leased to a tequila bar, one of the few new leases coming in 2021, Deering said.

“I don’t mean to be overly optimistic here; State Street still has some real problems,” he said. “The vacancy rate for the number of storefronts from Gutierrez to Sola is about 18%, the highest it’s been in decades.”

There are four vacant retail spaces in a row on the left side of the 700 block, Deering noted.

Moving onto the 800 block, there are another seven vacant storefronts. Starbucks on the corner of De La Guerra Street decided not to renew its lease, catching a lot of people by surprise, Deering said.

While the pandemic has accelerated closures along State Street, there were structural changes going on long before the pandemic, Rupert noted.

The underlying leasing issue should be addressed, Miller said. One way to do that is by looking at the street in terms of zones: a food and beverage zone, a recreation zone, and a shopping and theater zone, she added.

The 900 block of State Street is “probably the block that needs the most help,” Deering said. There are nine vacancies on that block, including the old multilevel Forever 21 building at 901 State St.

Lease rates in the areas with high vacancy rates have started to go down to about $2 per square foot, according to Deering.

“What that lease rate reduction does is that it opens the door for office tenants or new creative retailers to take a chance on a space,” he said, adding that the lease rates may come down even further.

The 900 block is also affected by a closed movie theater, which is typically a big draw to traffic.

Rent rates on the 1000 block of State have come down quite a bit since the pandemic began, Deering said. One of the main buildings on that block is Montecito Bank & Trust’s flagship building at 1000 State St.

The bank’s branches have remained open throughout the course of the pandemic, said George Leis, president of Montecito Bank & Trust. In the first round of the Paycheck Protection Program funding, the bank was able to generate almost $200 million of PPP lending to about 1,800 businesses, supporting 22,000 small-business jobs, Leis said. So far in the second round of lending, the bank has generated almost $100 million for 1,100 borrowers, he added.

“My dream is that when everyone is vaccinated, we can return State Street back to normal and we can welcome small businesses, tourists and clients back to downtown,” Leis said.

The Amazon building at the corner of State and Carrillo streets sold a few months ago for $36 million, and a new tech office user will be coming into that retail space, Deering said.

Moving to the 1100 block of State Street, three of the four corners of State and Figueroa streets are for lease.

“I never thought I’d see the day where a prominent corner of State has three vacancies at the same time,” Deering said.

What’s known as the theater district, between the 1100 and 1200 blocks of State Street, has been quiet with museums closed and The Granada Theatre not hosting events, Deering said.

“Hopefully there’s some good momentum when those places do open back up,” Deering said.

When looking at how to make downtown a friendly environment for both tourists and locals, Miller said the philosophy is that visitors want to be where there are locals.

“As we continue to develop a downtown that’s really for us,” she said, “that will feed our tourism traffic as well.”

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