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Santa Barbara News-Press: What to expect in 2013: South Coast business leaders weigh in…

January 13, 2013

What to expect in 2013 : South Coast business leaders weigh in about SB County’s economic prospects

Construction on El Encanto wrapped up in 2012. The iconic hotel, closed since 2004, is slated to reopen in March as an Orient-Express property. STEVE MALONE/NEWS-PRESS FILE PHOTOS
Santa Barbara, Calfornia – Published 1/13/2013
Santa Barbara News-Press
What to expect in 2013 : South Coast business leaders weigh in about SB County’s economic prospects
By Steve Sinovic, News-Press Staff Writer

Second in a two-part series

A year ago, business experts surveyed by the News-Press said a meaningful upturn from the Great Recession would finally occur in California and the South Coast in 2012.
Job creation, while mediocre in the best of times, ticked up slightly in the year ended and the tourist count — as reflected in measures such as transient occupancy taxes collected — returned to pre-recession levels despite the hassle of high gas prices.

While South Coast economist Mark Schniepp forecasts unemployment rates at or below 7 percent in the coming year, he said some companies still are cautious about making major hiring commitments, often turning to staffing and recruiting companies and temporary workers to help meet increased market demands.

American Riviera Bank is laying the groundwork for expansion with a second location in Montecito seen here at the corner of East Valley and San Ysidro roads. The new branch is expected to open later this month.

Thankfully, agriculture is one of the few bright spots in the local economy. Revenues are forecast to grow and should be in excess of $1 billion. For example, strawberries, the county’s top crop consistently, brought in $366 million in 2011 to local growers.

While South Coast housing improved moderately in 2012, nobody would mistake the current market for a boom. The gains in activity and prices were clearly a welcome relief, but left many homeowners still underwater.

Seldom was the U.S. outlook as uncertain as when the new year dawned. Though the nation has pulled back from the fiscal cliff, it remains up in the air how much the military — which accounts for a good share of economic activity in North County and with the region’s defense contractors — will be cut this year and beyond.

With the picture still somewhat murky, the News-Press reached out to a cross-section of the business community — whose industries are key drivers in the local economy — to provide a big-picture overview of the year to come.

In the following question-and-answer format, they share current trends and future indicators for economic growth for Santa Barbara County.

Participants are Kathy Janega-Dykes, president and CEO of the Santa Barbara Conference & Visitors Bureau; Jeff Devine, president of American Riviera Bank; Bob Tuler, principal/broker with Radius Commercial Real Estate and Investments; Dan Encell, a residential real estate agent with Prudential California Realty; and Tom Goodson and Justin Anderson of Ameriflex Financial Services. Kathy Janega-Dykes, Santa Barbara Conference & Visitors Bureau

The failed Chapala One project is expected to see new life in 2013 as it is converted to condos and commercial retail space.

Q: Your thoughts on the South Coast tourism industry in 2013?

A: Projections for the tourism industry in Santa Barbara in 2013 are for slower but stable growth. We saw strong recovery and rapid growth in tourism in the last two years along the Santa Barbara South Coast, but this is expected to stabilize.

While there are mixed economic signals nationally for many industries, the tourism industry is growing, hiring and making plans for expansion. On the South Coast, we have new properties opening, such as El Encanto, which is a good sign.

Revenue generated per room is expected to continue to rise and with it, transient occupancy tax collections for our local government.

Q: Are there any emerging trends?

A: To some people’s surprise, family travel is a growing segment in Santa Barbara’s tourism scene. Busy families are seeking destinations that offer attractions that appeal to all members of the family — adults and children alike. Santa Barbara has the variety these family groups are looking for.

In the last year, there has been a growing interest by media in Santa Barbara’s Funk Zone and the Urban Wine Trail. Both have generated considerable publicity as new attractions for our area.

The Urban Wine Trail is particularly appealing to visitors who do not have time to travel to the vineyards. However, we are finding that many return again to take an extensive tour of Santa Barbara’s wine country.

The latest research shows that both business and leisure travelers are making use of their mobile devices to book travel reservations. This makes creating content for mobile devices much more important.

The bureau’s new mobile site, which launched in June 2012, has shown triple digit increases in usage by potential customers.

Travel business from corporate and incentive meetings and groups is rebounding. The bureau, along with other community organizations, is working with staff at the Santa Barbara Airport to increase flights into the city, which will also give a boost to the group travel segment.

Destination marketing organizations (DMOs) like the Santa Barbara CVB are now a resource many American travelers rely on to plan their travels. In the past year, over 40 percent of leisure travelers reported using a DMO in their travel planning.

Q: What’s the status of developing a brand identity for the region? How multi-pronged is the effort?

A: We have in the past year developed a brand platform called Santa Barbara California’s True Character, which highlights our authentic and refreshing lifestyle.

This brand marketing effort was applied across all channels: online, offline, though social media and mobile platforms and to a variety of media assets, including an image library, which provides our membership and partners support in the promotion of Santa Barbara’s South Coast.

Q: How much does the agency spend on promoting tourism?

A: The Santa Barbara Conference & Visitors Bureau and Film Commission is a marketing organization. All our staff activities and programs are directed toward promoting tourism, bookings, conferences and working with film production companies.

This year we have a budget of $4 million. Approximately $2 million is generated from the tourism business improvement district assessment on participating hotels. All TBID funds are directed to programs that specifically market Santa Barbara and the South Coast hotels.

Q: How helpful is the TBID?

A: The Tourism Business Improvement District, which extends along our South Coast, has doubled marketing dollars and the results in our first year were excellent.

For example, in the first year of leveraging bureau funds with TBID dollars, our mobile website traffic increased 249 percent; website traffic increased 18 percent; our online bookings increased 18 percent; and group sales/definite room night bookings increased 39.2 percent.

With additional TBID funds, the bureau generated 47,888 incremental room nights, participating communities received marketing dollars for their tourism programs and there has been a noticeable increase in TOT (transient occupancy tax) revenue for all South Coast communities.

International visitation also remains strong. We have also increased focus on niche audiences in Australia, France and the United Kingdom.

Q: How is the bureau leveraging cruise ship visits to the area?

A: In the past year, cruise ship visitation grew. The bureau group sales staff has developed a program with collateral materials and a special cruise website that encourages passengers to come on shore and enjoy the restaurants and retail shopping available.

We are introducing interested area attractions to cruise ship company decision makers to develop land packages for their passengers. A new Santa Barbara microsite is promoted to passengers to encourage them to visit Santa Barbara again in the future. Jeff DeVine, American Riviera Bank

Q: What is your outlook on the local economy for 2013?

A: It still feels like a gradual thaw from the winter of 2008-2009. The slow recovery continues. I think each of the last three years have been just a little bit better than the prior one.

There are clear signs that the residential real estate market is beginning to rebound from its lows. There is strong buyer interest in moderately priced homes ($1.5 million and under) and four-unit and under residential income-producing properties where the mortgage financing is very attractive.

The year 2013 will be a decent one but it won’t be robust. There are still too many people that have been laid off from good-paying jobs.

Local government and higher education are two major employers in our area that are facing right-sizing decisions and won’t be able to help the employment level much. Jobs will have to come from the private sector.

Q: How do you think small businesses will respond to the president and Congress’ recent efforts to avoid the fiscal cliff?

A: Remember that small-business owners are normal people with houses, mortgages, kids and bills to pay just like the rest of us. The decisions made by Congress — and how those decisions personally impact the business owners — will profoundly influence their outlooks.

Most small-business owners I talk to are pretty concerned about the likely effect of paying higher income taxes, higher payroll taxes, increased local sales tax, increased taxes on capital gains, increased taxes on dividends and potentially losing tax deductions or having deductions limited.

For these reasons, small-business owners have been very cautious with their hiring.

Q: What are the opportunities for local community banks to grow market share given the merger of SBB&T and Union Bank? Do you think you’ll have more depositors by the end of next year?

A: Absolutely. American Riviera will have more depositors and deposits by the end of 2013. We’re counting on organic growth of about 14 percent from our existing downtown branch and growth beyond that from our Montecito branch, which will open in the Upper Village in March.

Other regional community banks will benefit from the merger of SBB&T and Union Bank. Union is a well-run bank; however, it is a big bank with international ownership and that will not be the best fit for all the former SBB&T customers.

I believe that many former SBB&T clients that truly value a banking relationship beyond just a branch to make a deposit or an ATM to withdraw cash from, will explore making a switch in 2013.

Q: You are branching out to Montecito in 2013. What other areas of the county would you like to grow the American Riviera brand?

A: I think we’ll focus our efforts in 2013 opening up the Montecito branch and making sure it is a success. Beyond 2013, I see us evaluating Goleta as well as the Santa Ynez Valley.

Q: How will banking change in 2013?

A: More banks will roll out “retail remote capture” technology allowing consumers to take pictures or scan their checks and deposits electronically.

Remote capture is already widely available for businesses, but most banks have been hesitant to roll the product out to consumers due to the risk of fraud. It is still too easy to take a picture of an altered check or submit the same check for payment twice.

The kinks are getting worked out, but this is a good product for consumers on the go and also saves on teller lines and staffing at the bank.

We expect to continue to see more developments in the “digital wallet” arena where eventually applications on our smartphones will store our ATM, debit and credit card numbers so that we can toss the plastic. Merchants will have to invest in the equipment to accept payment by smartphone, so expect progress to be gradual.

Due to the above, banks will see less and less of their retail customers in the branch to perform paper transactions. Banks will need to close down marginal performing branches or branches that are too large on a square-footage basis.

Expect new bank branches to be smaller and more technology driven. American Riviera’s new Montecito branch will be 1,500 square feet. Bob Tuler, Radius Commercial Real Estate & Investments

Q: What sectors of the South Coast commercial real estate market do you expect to grow the most next year?

A: The office market in both Santa Barbara and Goleta. There are several companies that have been holding back on moving. After the fiscal cliff was solved, they will now look to start expanding space. The are numerous options for companies to expand on the South Coasts.

Q: What segments will benefit the most from any sustained economic growth locally — office, industrial, retail, multi-family?

A: Industrial, office and retail will benefit most from sustained economic growth. Apartments are near capacity with low vacancy rates.

On a relative basis, there is a large amount of industrial space in Goleta and office space available in Santa Barbara and Goleta. This will allow the most for continued growth of companies on the South Coast.

Q: Many small-business owners who used to lease offices increasingly say they now work from home or places like Starbucks. What challenge does this present for your clients needing to fill up smaller spaces in older office properties?

A: Smaller spaces are just a small component of the total vacant space in the marketplace.

As more home-grown companies expand, then they will want to move back into private small office spaces. Client interaction remains a focus for small-business owners who understand the difference between meeting in an office versus a coffee shop.

Q: Do you expect owners to retrofit/remodel/rebuild tired spaces?

A: The reality of our market is one of limited supply and building owners have been able to keep properties leased with minimal improvements.

However, there have been several buildings renovated in 2012. One of these is 3757 State St., which consists of approximately 19,000 square feet across from Whole Foods.

Any time an older building is retrofitted there is new demand. The biggest area of renovation has been in the Funk Zone, which will attract more tourists and where building owners have substantially raised retail lease rates.

Q: How are retail clients retooling their bricks-and-mortar strategies as they compete with e-commerce?

A: Based upon Santa Barbara’s ability to draw tourists internationally, Santa Barbara has — and will remain — attractive to local, regional and national retailers.

Typically, when a new company moves into an old retail space, the new tenant will spend money to upgrade the older buildings with new improvements such as the storefront architecture, lighting, flooring and other required ADA upgrades.

Q: Can we expect to see any big-name retailers setting up shop in the new year? Are you entertaining any interest at present?

A: Yes. But at this point I cannot discuss the specifics. Dan Encell, Prudential California Realty

Q: From your perspective, what’s the outlook for residential real estate in 2013?

A: Our market bottomed out in early 2012. Since then, all price ranges have experienced improved conditions.

The year 2013 will be a continuation of that trend, with all price ranges experiencing improved market conditions. Distress sales are diminishing.

As the market improves, sellers are gaining more equity in their properties. As they gain more equity, the willingness to walk away from a property decreases.

Q: Can a middle-class couple still afford the American Dream of home-ownership? Or is the “middle class” defined differently on the South Coast? Is a real estate investment just for the wealthy and privileged?

A: The difficulty on the South Coast for “middle class” homeownership is saving the required down payment. Rents are frequently equal to ownership costs, so the big hurdle to homeownership is the down payment.

This is especially true for self-employed and entrepreneur buyers where the required down payment is typically larger than that required from a W-2 borrower.

Q: With home prices expected to rise next year, will more South Coast sellers come up from underwater and look at moving up or downsizing? Do you expect inventory to grow markedly in 2013 at all price points?

A: I expect that inventory levels will decline in all price points in 2013. As homeowners expect prices to rise, many will choose to wait to sell in order to capture future price gains. Homeowners who expect prices to rise should sell early if they are moving up in price range, and should wait if they are buying down or exiting the market entirely.

Q: Following a transaction, do your clients leave the market or buy elsewhere in the area?

A: Those sellers who had to sell were not able to re-enter the market. Many other sellers scaled down to smaller homes. Most stayed in the area.

Q: Mortgage availability is tight for well-paid, self-employed individuals who lack W-2 income. How are they financing deals? More money down/higher interest rates?

A: Lending is still a big hurdle in our area for jumbo loans. Buyers are forced to put down substantially larger down payments and pay higher interest rates than in lower-priced markets. This condition will ease in the future as lenders begin to feel more confidence in the higher-end market.

Q: How does your law background come in handy for both sellers and buyers?

A: Every real estate transaction involves a detailed contract with many variables. For most buyers and sellers, their real estate transaction is their most important financial transaction. It is invaluable to have an agent with training in real estate law involved in every step of the transaction.

Q: What three solid skills should a Realtor bring to the table on behalf of a client?

A: Expertise in the specific geographic area and price range of the transaction. Mastery of the contract and all related forms. And great communication skills.

Q: Do you ever foresee something creative like 40- or 50-year mortgages on the horizon?

A: Once rates rise from the historic lows we are experiencing now, we will see more creative loans, like a 40-50 year mortgage to help homeowners.

Q: How do you tell a confirmed renter that home buying is a good move?

A: I ask potential buyers lots of questions to see if homeownership is right for them. There are often many nonfinancial factors that influence the decision to buy (flexibility, job or relationship uncertainty, etc.). I usually advise on the financial aspects.

Q: Give us a sense of sales volume for the year that just ended. How significant are real estate commissions to the local economy?

A: There was over $800 million more in sales volume in 2012 compared to 2011. This translates to an extra $40 million in real estate commissions in our area compared to 2011. There was over $110 million in overall commissions in 2012 in our area.

Real estate commissions are an important part of our local economy. Tom Goodson and Justin Anderson of Ameriflex Financial Services.

Q: What is one of the best pieces of financial planning advice someone could receive this year?

A: Focus on “return of capital” as much as “return on capital” with investments in 2013.

Q: Do investors need to adjust financial-planning strategies based on upcoming tax changes?

A: Yes. It will become more important, especially for California residents, to structure assets to minimize taxes where possible. For example, owning income-based assets in IRAs or 401ks and owning longer-term capital appreciation assets in regular accounts (are strategies).

Q: Were you having a lot of conversations with clients in late 2012 about California tax changes scheduled to take effect? Detail briefly the kinds of moves clients made relative to their investments (e.g. sales of real estate, stocks).

A: There were some conversations — ultimately there is still a lot to be determined.

A number of clients did choose to sell long-term capital gain assets such as real estate and concentrated stock positions in late 2012 (instead of 2013 and beyond) because they know the federal long-term capital gains tax rate in 2012 was 15 percent.

It’s important to understand that every situation is different and why investors should speak with a professional prior to making changes to their portfolios

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