SANTA BARBARA, CA—A private investor operating under the name Hollywood Western LLC has purchased a 46,813-square-foot retail property on State Street in Santa Barbara from State Street Properties LLC, GlobeSt.com reports exclusively. An Off Saks 5th Avenue currently occupies the property, but has a lease that rolls in three years. Because the property is located in the high-barrier-to-entry State Street area, the investor took the risk, paying $15.5 million at a 5% cap rate.
"This was a 5% cap rate on in-place NOI, and the term of the lease had three years remaining. There is some risk to the buyer, and yet they were still willing to pay a 5% cap rate," Clarice Clarke, the president of Lee & Associates Santa Barbara, tells GlobeSt.com, adding that State Street has extremely high barriers to entry. The buyer wanted to be in this location and was willing to take a 5% cap rate and potential re-tenanting risk to be there. Clarke represented the seller in the transaction, along with Lee & Associates' principal Stephen Leider.
Even if the tenant were to vacate the property, however, the demand on that section of State Street is so high, the new owner shouldn't have a problem back filling the building to another single tenant. "State Street is our Fifth Avenue, if you will," Leider tells GlobeSt.com. "There are sections of it where the retail presence and the tenancy is stronger, and that is really in the 1200 block and down to the 700 block, so there is a five-block area, and this is in the epicenter of that area. It is a main and main location."
The seller received an unsolicited offer, and, because the property was in a family trust, agreed that this was a good time to sell. As a result, the property was not brought to market. "There was no bidding on the property, and it was really just an opportunity to take some chips off the table," explains Leider. "We got an offer that was acceptable, and it was a cash offer. If we had gone the traditional way, frankly, we might have done better, but the seller didn't want to go through that process."
While this is a highly popular retail market, in the years since the recession, it has become popular for cost-conscious retailers, like H&M, Urban Outfitters and Forever 21. Still, according to Clarke and Leider, the area has an extremely low 2% retail vacancy, often with waiting lists for openings. "During the recession, there were a lot of leases signed to off-price soft good retailers, and that is still the case; but I believe that when those leases of the smaller shops come up for renewal, they may be backfilled with higher quality tenants. The economy is stronger," says Clarke.
To help fuel the shift, a new ownership structure has recently taken over the Paseo Nuevo mall in the 700 and 800 block of State Street near the Off Saks 5th Avenue. The ownership plans to refurbish and reposition the mall and upgrade the tenancy in the center as leases turn. "I think that will have a positive affect on the State Street area," adds Clarke. "They are looking for more high quality food tenants in that area and to draw in some of the very successful mom-and-pop businesses."
The Santa Barbara market is active across sectors. Los Angeles-based Caruso Affiliated is investing in the market, building a hotel and resort in Miramar beach. The developer recently named Rosewood Hotels & Resorts as the hotel operator for the development.
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Kelsi Maree Borland
