By: James Buckley-Santa Barbara Sentinel. [Excerpted]
A couple issues ago (Sentinel #4/6), we opined in these pages that “all things being equal (and they never are) you should own the place where you live”.
That advice could also, perhaps as compellingly, be applied to the place where you work. Especially if you are a small- business owner with a triple- net lease on an office or small manufacturing space of, say, less than 1,5000 or 2,000 square feet in size.
Why? You ask.
Well, mainly to lock in a rent certain for the next, oh, 20 years. After which you’d own the building or condominium unit you are occupying. And let’s call it what it is: your workspace. Not only would you own it you’d also have something to sell that may considerably enhance the value of your company.
There is probably not a business owner out there, big or small, who hasn’t experienced rent shock when the building he’d been occupying with a five- or ten- year or longer lease is sold, and the new owners adds a healthy percentage hike in order to cover the new real-estate tax and insurance costs. That, of course, is what triple- net is all about, as it is you, dear lessee, who are on the hook for any change in those “triple net” costs: real estate taxes, insurance, and maintenance whatever they be and wherever they go.
The market is tight for a free- standing building in the Santa Barbara area, and it is also tight even in what we’ll call the commercial condominium market, but there is still a chance to buy, though perhaps not in the most desirable areas.
What’s Out There
There really isn’t much on the Santa Barbara market, but if you are looking for a small to medium commercial condominium, you’ll be paying somewhere between $800,000 and $2 million depending upon location and size. There is a 658 square-foot, second- floor unit for sale at $399,000 at 1215 De La Vina Street, and a free-standing building at 1032 Santa Barbara Street, right across from the Courthouse with an asking price of $1,925,000.
The most expensive property available (it is now under contract, we hear) is the former 118,000 square-foot CKE and Procor corporate offices on the bluffs in Carpinteria at $32,500,000.
The State of the Market
Sales agent Liam Murphy, CCIM (Certified Commercial Investment Member) with Hayes Commercial Real Estate (563-2111) notes that “Since the 2008 downturn, the market has recovered, but it was a long time coming”. He breaks the events down into short cycles: “in ’08, there were still a small number of high- priced deals concluded; there was a lot of demand both on the purchasing side and the leasing side; in 2009 and 2010, demand and values dropped for leased spaces. People were giving up space, which caused property owners to drop their lease rates to attract more interest”, Liam says. Property valuation expectations were tempered. Major concerns with the global economy played a large role in the market’s hesitation. “There were not a lot of people willing to say, ‘If I buy something now, I know I’m going to make money on it’. So, many of them didn’t. They sat on their hands, wondering if it is going to get worse”
By 2011, 2012, the market stabilized. “More people were confident we had gotten through the worst,” Liam says. “But, they still weren’t convinced that if they threw three million dollars at real estate it would grow and multiply like the good old days”.
By the end of 2014, however, confidence has nearly been fully restored. “We’re definitely in the part of the cycle where generally companies are confident about their businesses growing”, Murphy suggests. “Investors have begun to realize returns on their investments because rental rates have gone up. Also, property values have gone up. So, if someone took the leap in 2012 or 2011, they’ve definitely seen a significant appreciation.”
Murphy believes there is some time left for property values to continue to rise. One of the reasons he believes so is that private investors and businesses “are now sitting on a lot of extra cash, since their revenues have grown over the last couple of years.”
Where to Interest Rates?
“If interest rates were, say, 6.5 or 7 percent, which is more of an historical average, versus the maybe five percent they are right now” Liam opines, “I can see where there’d be less people able to afford investments in commercial property.” More people with more capital than they had a couple years ago and very low interest rates signals a continuing case for making a purchase. “Lots of business owners are looking to buy what they are currently leasing” he says.
Physicians, dentists, accountants, and attorneys are the likeliest purchases of their own spaces, but psychologists, consultants, architects, and even newspaper publishers could find the right mix; retail, however, may not be the most appropriate purchasers.
The Haley Street Corridor
Greg Bartholomew (with Hayes) is heading up leasing a 19,000 square- foot, one- story building featuring an open courtyard called The Mill Project, on the corner of Laguna and Haley streets. It’s an old industrial structure that Darrell and Kirsten Becker purchased and redesigned. So far, Greg signed leases with a local winery that’s going to be producing wine, along with a tasting room, as well as a brewery that’ll have its production space and tap room on site; other restaurants and shops with follow.
“The cheapest prices are in Goleta and Carpinteria, so they’re the best place to get a foot in the door,” Liam says, but points out there is “lots of interest in the Laguna, Haley, Gutierrez corridor. “It’s poised for further growth, similar to what the Funk Zone was maybe five years ago. Anyone who bought anything in the Funk Zone five years ago is probably very pleased with that investment decision,” he says.