Santa Barbara development on Anacapa Street
Downtown Santa Barbara has been a focus of housing and business development in recent years, and this mixed-use building under construction at 634 Anacapa St., at the corner of Anacapa and East Ortega streets a block from City Hall, is one of many projects created under the city’s Average Unit-Sized Density Incentive Program. It was designed with 30 residential units and commercial space. (Giana Magnoli / Noozhawk photo)

This is Noozhawk’s Housing and Development Report, the first of what we expect will become a regular analysis of Santa Barbara County’s housing market and important projects.

Our goal is to expand the scope of this report from the City of Santa Barbara to the South Coast and eventually, the entire county.

Based on our readership and audience surveys, we know there’s a lot of interest in housing, development, planning and land use, and we want to dig deeper into the impacts of planning and policy decisions in the community.

In part, the idea for this report grew out of Noozhawk’s acclaimed Reimagine: Santa Barbara project, a year-long exploration of downtown Santa Barbara’s challenges and opportunities.

We know that the lack of affordable, workforce housing contributes to Santa Barbara’s large commuter population, difficulty recruiting and retaining quality employees, and socioeconomic issues such as the high rates of food insecurity.

Cities with the lowest median home prices (Santa Maria, Lompoc, Ventura) have thousands of outgoing daily commuters to workplaces with the highest rents and median home prices (Goleta, Santa Barbara, Carpinteria).

Housing Development in the City and State

The lack of housing affordability is an issue for all of California, and legislators have passed housing policy changes, including the legalization of Accessory Dwelling Units, or ADUs), and Senate Bill 35, which forces municipalities to streamline review for some residential projects and develop objective design standards.

Design rules are often subjective in Santa Barbara, where review board members request changes in un-specific terms, such as asking architects to make a balcony or a roof look “more poetic.”

California also issues housing development mandates, and Santa Barbara has not gone far toward its target of building 3,083 new units by 2023.

The city of Santa Barbara has tried to boost rental housing development with its Average Unit-Size Density Incentive Program, which allows more units than would usually be allowed in specific zones.

Arlington Village Santa Barbara development

The Arlington Village luxury apartments in downtown Santa Barbara, at 1330 Chapala St., were built under the city’s Average Unit-Size Density Incentive Program. (Giana Magnoli / Noozhawk file photo)

Despite the controversy over the program, significant amounts of rental housing is under construction in Santa Barbara for the first time in 40 years.

But the units being built are more expensive than the city hoped, and the City Council passed an inclusionary housing ordinance in July to require some moderate-income units in future AUD Incentive Program projects.

In Santa Barbara, “moderate income” means a two-person household earning about $76,000 a year, and “affordable” rent would be less than $2,000 a month.

Household income and rent affordability chart

This chart shows household income versus “affordable” (30 percent of gross income) rent based on the Santa Barbara median income of $79,600. (City of Santa Barbara graphic)

Under the affordability calculation of paying no more than 30 percent of gross income on rental housing, a two-person household would have to earn more than $125,000 to “afford” the $3,000-plus monthly rents of newly built apartments in Santa Barbara.

A note about ADUs: The Santa Barbara housing market is characterized by high home prices and a crowded rental market, so it’s no surprise that residents have rushed to build Accessory Dwelling Units in the backyards and above the garages of their single-family homes.

The city has received hundreds of applications and approved dozens of projects.

Under city rules, one of the dwellings (the primary home or ADU) must be occupied by the property owner, and many of these ADUs likely will become rental housing. They’re prohibited from becoming short-term rentals, however.

Why Isn’t More Housing Being Built Downtown?

There’s not much housing being built in the State Street corridor, despite the fact most stakeholders agree it’s a good idea that could help revitalize downtown.

Economic studies concluded that building AUD Incentive Program projects in the Central Business District (downtown) isn’t feasible because of high land costs, according to the city.

City leaders are trying to change that, and recent meetings on the AUD Incentive Program have focused on the downtown area, with suggestions to boost density, raise the building height limit, and allow alternatives to on-site parking to incentivize development.

City project map

There has been a “doughnut hole” in Santa Barbara zoning and the Average Unit-Size Density Incentive Program, with very few housing projects built or proposed along downtown State Street itself. (City of Santa Barbara graphic)

The City Council already voted to loosen parking restrictions and forbid these projects from being converted to vacation rentals.

The Priority Housing Overlay and AUD Incentive Program maps skipped around State Street downtown, leaving a “doughnut hole” of medium-high-density zoning (up to 27 dwelling units per acre), which is lower than neighboring blocks, which allow up to 63 units per acre.

One of the few downtown State Street AUD Incentive Program projects is to convert the former Noozhawk offices at 1327 State St., above and on the backside of Opal Restaurant & Bar, into two residential units.

Alley view of Opal and adjacent building

Construction has started on a project to convert the former Noozhawk offices at 1327 State St., adjacent and above Opal Restaurant & Bar, into two residential units. (Giana Magnoli / Noozhawk photo)

In need of more parking and a different office configuration, Noozhawk moved out of that 1,500-square-foot, second-story space at the end of 2017, during construction of the adjacent Arlington Village luxury apartment complex. That project has been approved and is in the building plan check process, according to the city, and construction appears to have started since the interior is torn down to the studs.

Several blocks away, another project proposes a third-story addition with two residential units atop the existing commercial building at 801 State St., which was home to the Brat Haus until recently.

Ownership and Rental Housing Market

More than 60 percent of Santa Barbara residents are renters, and the region is known for its ever-increasing rents and very low vacancy rate (unoccupied/available units).

Santa Barbara is “the tightest market probably in California,” with a 1.85-percent vacancy rate in the latest count, according to Mark Schniepp of the California Economic Forecast. The vacancy rate has been below 2 percent since 2011.

Even with a building boom in California, and new units being constructed, residential vacancy rates remain low, he said.

Buying a home is “just not affordable here for millennials,” which has pushed the rental market to where it is: high rents, and a low vacancy rate, he told the Santa Barbara Association of Realtors last summer.

Rental vacancy rate chart

This graphic depicting rental vacancy rates over time shows a midyear 2019 South Coast apartment vacancy rate of 1.85 percent.

(California Economic Forecast graphic)

Rental vacancy rate chart

This graphic depicts rental vacancy rates over time for California as a whole, which are higher than the Santa Barbara County’s South Coast. (California Economic Forecast graphic)

Millennials are the generation born roughly between 1981 and 1996, making them 23-38 years old in 2019 — the “young professionals” so many government officials and businesses talk about. (If you find yourself making a comment about “kids today,” make sure to call them Generation Z.)

Housing Affordability

The median home price in Santa Barbara County was $710,000 for the third quarter of 2019, according to the California Association of Realtors. The statewide trade association’s housing affordability index calculates $3,480 in monthly costs for that median-priced home, and a minimum qualifying income of $139,200.

All those numbers are higher than neighboring San Luis Obispo and Ventura counties, which had median home prices of $635,000 and $667,500, respectively, for the same time period.

California Association of Realtors chart

In the third quarter of 2019, 22 percent of Santa Barbara County residents were theoretically able to purchase a median priced home, according to the California Association of Realtors. The California average was 31 percent. (California Association of Realtors graphic)

Statewide, the median price of a condo or townhome was $465,000, which translated to monthly payments of $2,280, and a minimum qualifying income of $91,200, according to the California Association of Realtors. In the third quarter of 2019, 31 percent of California households were theoretically able to purchase a median priced home.

A December report from the Central Coast Alliance United for a Sustainable Economy found that monthly rental housing prices have increased 27 percent in Santa Barbara and Ventura counties over the past five years, while wages have increased only 8 percent.

Renters represent 51 percent of the population in Santa Maria, and 60 percent in Santa Barbara.

South Coast Median Home Prices

The December 2019 year-end report from Fidelity National Title Group Santa Barbara shows 603 single-family home sales for the year in Santa Barbara, and 256 condo sales.

The median sales price for those 12 months was $1.24 million for a single-family home and $760,000 for a condo. Hope Ranch, Montecito and Summerland median sales prices were even higher.

Estancia Santa Barbra

The Estancia Santa Barbara development at 3714 State St. includes 72 townhomes and single-story houses for sale. (Giana Magnoli / Noozhawk file photo)

In Santa Barbara, in December, a two-bedroom home on North Alisos Street and a two-bedroom cottage in the 400 block of Bath Street with “fantastic upside potential” had the lowest sales prices of single-family homes, at $600,000 and $601,000, respectively.

The highest sales price was a new four-bedroom house on Cieneguitas Road — in the foothills above northwest Santa Barbara — that sold for $4,104,000.

December sales prices for condos in Santa Barbara ranged from $435,000 to $3.2 million.

Fidelity median home sales price chart

Last year’s median sales price is the third-highest on record, behind 2005 and 2007, since 1990, according to Fidelity National Title Santa Barbara. (Fidelity National Title Santa Barbara graphic)

There were 1,305 single-family residences sold on the South Coast (Goleta, Hope Ranch, Santa Barbara, Montecito, Summerland and Carpinteria) in 2019, according to Fidelity’s latest report, and the number of sales, the average sales price, and median sales price all increased compared to 2018.

Fidelity’s report on South Coast median sales prices going back to 1990 shows 2019’s year-end number — $1,031,000 — is the second-highest on record, behind 2007.

4-1-1

Time to redefine fixer-upper: Noozhawk received an email tip in late June pointing to a listing of a “huge fixer” on the market in Santa Barbara: a two-bedroom house on West Micheltorena Street with an uninhabitable second unit by the garage — for $830,000. It sold for $747,000 in early December.

Why we use median sales prices instead of the average: The median sales price is the middle number in the set (half the home sales prices are lower and half are higher) while the average is the total sales price divided by the number of sales.

Averages are more sensitive to outliers, easily shifted by one $10 million piece of real estate (and this is Santa Barbara, after all). For December 2019, while the median sales price for a single family home was $1.2 million, the average sales price was just over $1.5 million.

Commercial Real Estate Market

Let’s Talk About State Street

Last July, the city released a consultant’s report on downtown Santa Barbara that confirmed what everyone already knew.

As Noozhawk’s Joshua Molina reported at the time, “The long-awaited Kosmont Report cost $84,000 and is 87 pages of observations, suggestions and recommendations — most of which came up during the mayoral campaign two years ago, and in a variety of public and private conversations with just about anyone since.”

City Council members decided to hire an economic development director and named a business liaison officer to help people navigate the permit process.

The city should “provide easy permits for temporary pop-up users, facilitate infill housing or live/work space in back of vacant buildings along State Street, and incentivize a blend of residential, office and hotel reuse of vacant commercial buildings,” according to the report.

“The report emphasizes the need for retailers and the city to reshape the downtown as a destination for experiences and community events, rather than just shopping and dining, to attract locals,” Hayes Commercial Group noted in its midyear report.

In the third quarter of 2019, there was a State Street storefront vacancy of 12 percent between the 400 and 1300 blocks, according to numbers from Hayes Commercial Group and Radius Group. It was even higher — at 15 percent — for the stretch between Carrillo and Gutierrez streets.

There is a lot of activity downtown, though, with several new restaurants and shops opening their doors recently. Temporary stores — like the World of Magic Halloween shop in the former Macy’s in Paseo Nuevo — have also popped up throughout the corridor.

The increase of pop-up tenants “suggests more willingness on the part of landlords to sign short-term leases,” Radius Commercial Group noted in its third-quarter report.

Downtown State Street at Anapamu Street

Stores, restaurants and a theater line the 1200 block of State Street in downtown Santa Barbara. (Giana Magnoli / Noozhawk photo)

Santa Barbara has not implemented the top recommendation of the consultant report — hiring an economic development director — but did create a business liaison position to help businesses through the permitting process.

“While it remains to be seen just exactly what steps will be taken to help facilitate prospective tenants in their efforts to set up shop, this move is encouraging as the community looks for leadership, vision and creativity among its key stakeholders to improve conditions for retail commerce throughout the city for the long haul,” the Radius report said.

Just east of State Street, there is a “hot spot” for retail real estate transactions.

“Whether you call it SoCo (South of Cota), the Lagoon District or the Laguna District, the neighborhood surrounding East Haley and Gutierrez Streets in downtown Santa Barbara continues to be the hot spot in Santa Barbara for commercial sales,” Hayes said in its mid-2019 report.

“There have been 27 sales valued at $57 million over the past two years in the area from Cota Street to Highway 101 and from Milpas to Anacapa Street.”

Most of the buyers are owner-users, the report added.

Beer (and Wine, and Cocktails) Boom

Employment data show a growing workforce in the restaurant and bar industry, and many retail vacancies are being filled with beer.

At least five breweries have opened downtown on State Street in the past couple of years, with many more drinks-centric businesses opening throughout the city.

Kim’s Service Department Santa Barbara

Breweries and bars have been flocking to downtown State Street, and Kim’s Service Department has both with the Modern Times brewery and Shaker Mill Cuban-inspired cocktail bar in the 400 block.
(Giana Magnoli / Noozhawk photo)

The new-ish spots for beer include Night Lizard Brewing Company, 607 State St.; The Cruisery, which replaced the now-closed Santa Barbara Brewing Company at 501 State St.; Institution Ale Company, 516 State St.; Draughtsmen Aleworks, which shares the Mosaic space at 1131 State St.; and Modern Times Beer, 418 State St., which shares the Kim’s Service Department space.

And that’s not all, with Goleta’s M. Special Brewery moving into the former Tonic space at 634 State St., and Carpinteria’s Rincon Brewery leasing 205 Santa Barbara St. in the nearby Funk Zone.

It turns out 2019 was a big year for coffee and restaurants, too.

Office Vacancy Rates

Santa Barbara’s office vacancy rate was higher than Goleta’s, for the first time ever, in the second quarter of 2019 (Santa Barbara’s was 6.8 percent to Goleta’s 6 percent), which was repeated for the third quarter, according to Hayes.

“Anecdotal evidence suggests that among some office tenants, Goleta’s appeal is growing in comparison to downtown Santa Barbara,” Hayes reported.

Santa Barbara commercial rents average about 40 percent higher per-square-foot than Goleta, and Goleta’s amenities and housing opportunities for office workers have been growing in recent years, according to the report.

“Clearly, strong demand among tech companies to be on or near State Street remains — as evidenced by recent leases by Amazon, Invoca and Honey Science — but many tenants are seeing both Santa Barbara and Goleta differently than they did, say, five years ago.”

Industrial space is in high demand in Goleta as well, with a record-breaking 29 leasing transactions in the first 10 months of 2019, according to Hayes.

Noozhawk managing editor Giana Magnoli can be reached at gmagnoli@noozhawk.com. Follow Noozhawk on Twitter: @noozhawk, @NoozhawkNews and @NoozhawkBiz. Connect with Noozhawk on Facebook.

A stylized hawk's head on a red background

Giana Magnoli, Noozhawk Managing Editor

Noozhawk managing editor Giana Magnoli can be reached at gmagnoli@noozhawk.com.