The only sustainable way to foster long-term economic growth is by building more housing, said Chris Thornberg, founding partner of Beacon Economics.
“If you want Ventura to grow faster, if you want Santa Barbara to grow faster, you have to start with a conversation about housing,” Thornberg told about 300 people at Fess Parker’s Doubletree Resort in Santa Barbara at the ninth annual Radius Real Estate and Economic Forecast on Oct. 25. “As far as housing, we have a big problem.”
It’s a problem that will persist barring a major shift in policy, he said.
The current slow-growth mantra has increased housing costs and driven many residents out of the region or to the more affordable areas like Santa Maria and Oxnard. This has had a wide-ranging impact on all aspects of the economy.
Proposition 13, coupled with the California Environmental Quality Act, deter development, Thornberg said. Prop 13, which includes a 2 percent annual cap on property tax rates and limits the frequency and scope of property value reassessment, and CEQA’s frequent use as a development obstruction have created a housing-jobs imbalance, Thornberg said.
“By limiting property taxes, you have limited the incentive of local governments to want housing and empowered NIMBYs by making housing a bad investment for a local city,” he said.
More people who make more than $100,000 a year are moving from Texas to California than California to Texas, Thornberg said. Rich people will move to California, drive housing costs up and squeeze out middle- and low-income families, he said.
“In other words, we are just going to create ‘Country Club California,'” Thornberg said.
In Ventura and Santa Barbara counties, the numbers of single-family permits issued are nowhere near where they were a decade ago, he said. While there was a recent surge in multifamily permits, it has leveled off.
The permits that are issued are often for more expensive housing, Thornberg said.
“But workforce housing, what we most desperately need, is not really being helped at all,” he said.
There is some relief in sight, said Steve Golis, Radius principal and co-founder. The city of Santa Barbara’s Average Unit-size Density program, which creates incentives for developers to build smaller, more affordable units, will ease the “virtually nonexistent” sub-1 percent South Coast multifamily vacancy rate, he said.
“We haven’t felt much of the AUD program yet because much of it hasn’t been built yet, but a softening of the vacancy rate is a good thing,” Golis said.
Golis expects rents to plateau slightly through 217, cap rates to hover around the status quo given the low interest rates, and demand to remain strong for apartments through 2017 as investors stay “absolutely committed to multifamily properties,” he said.
As far as the Santa Barbara commercial real estate market is concerned, the Funk Zone has surpassed State Street interest and activity by most measures, speakers said.
Prior to the event, two brokers were talking in the hotel lobby. A broker who had been shopping a property in the 900 block of State Street mentioned that there have been few interested tenants. What was once a hot zone for real estate has tapered off, he said.
The Funk Zone has evolved from a place for fish processing plants and other industrial uses into a hub of retail, office and industrial use that has drawn significant investment. The area will be bolstered by the La Entrada project on lower State Street that will bring a 123-room hotel and about 19,000 square feet of commercial space, which could garner rates of more than $7 a square foot, Radius Vice President Gene Deering said.
“The Funk Zone is the new hot spot for any type of use that want to be down there in that epicenter of fun and excitement,” he said. “For so long State Street was where a tenant wanted to be. It’s shown the transition and amount of demand the Funk Zone has commanded.”
Funk Zone overflow has trickled down to Haley Street corridor into projects like the fully leased Mill project and the surrounding area.
“We are going to need property owners on State Street to start to pivot and adjust their rents to compete with some of the traction in the Funk Zone, on Haley and Gutierrez,” Deering said.
Deering also highlighted Carpinteria’s office market, which has had a major rebound from its 21 percent vacancy rate in 2015 to its current 2 percent.
The construction software developer Procore has made a significant dent in the office sector, snapping up more than 95,000 square feet of office space, Deering said.
“They started with 1,200 square feet in Montecito – they have grown over the last six years at an incredible rate,” he said.
There is an 85,000-square-foot parcel at 6380 Via Real in Carpinteria zoned for office and research and development space that could add more supply when it comes to fruition.
Despite companies like Mentor, Allergan and Raytheon downsizing or defecting, the Goleta office sector has remained relatively stable.
Industrial remains the hottest commercial category in the region with only one space available in Santa Barbara. The city’s plan to develop industrial space for startups and other R&D services will eventually help but expect lease rates to increase in the interim, the report says.
Bob Tuler, Radius principal and co-founder, expects the overall commercial real estate market to remain strong given the limited inventory of for-sale properties, which will likely continue through 2017.
The increasing number of 1031-exchange buyers will also continue to dominate the market, he said.
“There are more out-of-town exchange buyers than ever before,” Tuler said. “They like Santa Barbara because of the low vacancy, the limited growth and the name ‘Santa Barbara.'”
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