Saturday, January 20 , 2018, 3:54 pm | Fair 62º


Craig Allen: The Funk Zone May Offer a Unique Investment Opportunity

It's hip, it's edgy, and it's a neighborhood that is primed for a Santa Barbara real estate boom

I am a bit of a history buff. More to the point, I like to understand history as it relates to investing, to try to identify possible opportunities for future investment and profits. Cycles tend to repeat themselves, and many trends are driven by popular attitudes, opinions and beliefs. If we can understand these factors, we can sometimes find good investment opportunities in new markets or new geographic areas. Santa Barbara’s Funk Zone may be a case in point.

The Funk Zone is edgy, cool and hip, with many mixed-use businesses and properties. It’s located near the waterfront, in an area roughly bordered by State, Mason, Garden and Yanonali streets. Much of this area was an industrial zone in years past, but more recently it has enjoyed a rebirth as more of an arts and entertainment zone, much like the transformation of New York City’s SoHo neighborhood.

Starting in the 1950s, creative, inspired, artistic individuals with an imaginative zest for living and an economic need for low rents began to move into SoHo (south of Houston Street). In the ‘60s, the avant-garde art scene flourished in SoHo, permanently establishing the cool factor for this area of New York City.

This district offered a multitude of inspiring cast-iron buildings, many of which were abandoned, or could be rented on the cheap. They also offered huge open spaces; perfect for artists looking for enough room to create and showcase large works.

In 1962, the City Club of New York published a report on underutilized commercial areas called “The Wastelands of New York City,” and characterized SoHo as “an enormous commercial slum.” The neighborhood was considered for demolition to make way for the Lower Manhattan Expressway, and was almost demolished before urbanologist Jane Jacobs led strong opposition based on the historical significance of the architecture of the buildings throughout the district, which resulted in SoHo’s preservation.

Over time, the upwardly mobile recognized the appeal of SoHo and began to move into the area. Real estate values soared. Today, SoHo is one of the most desirable areas in all of New York, with a median sales price of $2.6 million — 138.22 percent higher than the median sales price for New York overall.

To me, Santa Barbara’s Funk Zone represents a similar, although much smaller and much less historically significant, opportunity here. It is very strange to have real estate in coastal California so close to the water that is less desirable, and lower priced, than other areas of town that are much farther from the beach.

There are certainly issues with this area, not the least of which is the current zoning for many of the buildings. The neighborhood is, admittedly, a bit gritty, and there are some areas where pedestrians might not feel entirely safe at night. But given the relatively low cost of properties in this area, I believe, over time, more and more development will take place, and more exciting businesses will move into the area. As more businesses establish a presence, interest in the area will increase, as will daily traffic.

There are already many interesting businesses in the area, including the core of the Santa Barbara Urban Wine Trail: Oreana Winery, 205 Anacapa St.; Santa Barbara Winery, 202 Anacapa St.; Kunin Wines and Municipal Winemakers, 28 Anacapa St.; Whitcraft Winery, 36 S. Calle Cesar Chavez; and Kalyra Winery, 212 State St.

Also in the neighborhood are Red’s Wine Bar & Tapas, 211 Helena St.; Union Ale, 214 State St.; Metropulos Fine Foods Merchants,  216 E. Yanonali St.; Channel Islands Surfboards, 36 Anacapa St.; Santa Barbara Surf Shop, 10 State St. and open since 1962; and the Santa Barbara Surf Museum, 16 Helena Ave. The Fishnet Retail Gallery & Theatre, 46 Helena Ave., offers everything artistic, from parties to performances, to art exhibits.

For those interested in shopping, there are all kinds of little shops with a multitude of interesting and eclectic items for sale. There are also bike, scooter, and Segway rentals for those who want an alternative way to explore the area, and there are several fantastic restaurants in the Zone, or close by.

One possible reason that this area has not already exploded with development is the disconnect between Lower State Street on the north side of Highway 101 and the Funk Zone. Although there is a sidewalk and a bike lane, the reality is that many people get to the “end of State” at the freeway, and then turn around and go back up to downtown. There is definitely a mental barrier created by the freeway in the minds of many pedestrians and bike riders that somewhat restricts traffic from downtown to the Zone.

One interesting solution could be for Funk Zone business owners to establish a business association, pooling their resources. A combination of a marketing/media campaign to raise awareness of the positive attributes of the Zone, along with establishing some kind of transportation solution, such as an electric cart shuttle service, at least on the weekends, could provide a direct link between Lower State and the Zone. If pedestrians had a reliable shuttle service that operated throughout the weekend — so they could easily and quickly travel back and forth between downtown and the Funk Zone — I believe many more people would frequent the area, businesses would prosper and real estate values would rise.

Over the long term, I believe the Funk Zone will be one of the fastest growing areas of Santa Barbara, and will represent one of the most attractive real estate investments available anywhere in the community. When the real estate market finally bottoms, our local market should be one of the first to rebound. Few areas represent such a deep discount as the Funk Zone, even compared to other neighborhoods that have experienced significant drops in values.

I believe prices will make a dramatic slingshot move, once the market begins to rebound. Those with the foresight and who are willing to take the risk, could enjoy some of the most impressive profits to be made in real estate during the next bull market phase.

Craig Allen, CFA, CFP, CIMA, is president of Montecito Private Asset Management LLC and founder of Dump Your Debt. He has been managing assets for foundations, corporations and high-net worth individuals for more than 20 years and is a Chartered Financial Analyst (CFA charter holder), a Certified Financial Planner (CFP) and holds the Certified Investment Management Analyst (CIMA) certification. He blogs at Finance With Craig Allen and can be contacted at .(JavaScript must be enabled to view this email address) or 805.898.1400. Click here for previous Craig Allen columns. Follow Craig on Twitter: @MPAMCraig.

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