bae urban economics Memorandum

Transcription

1 bae urban economics Memorandum To: David J. Moon President Coleraine Capital Group, Inc. Stephen Clarke Director of Market Rate Housing AMCAL Multi-Housing, Inc. From: Raymond Kennedy Director of Research Date: April 18, 2016 Re: Arcata Student Housing Project Introduction Coleraine Capital Group and Amcal Equities have proposed The Village, a student housing project in Arcata, CA, designed to serve students of Humboldt State University. The project is proposed on land currently used and designated as industrial. The City of Arcata has requested that the developers commission an economic impact study regarding the effects of this proposal on the industrial market in the City. The developers have selected BAE Urban Economics ( BAE ) to complete this study; the analysis focuses on the impacts on Arcata's industrial land supply and market if the 9.5 acre parcel proposed for reuse as student housing is removed from the city s industrial inventory, in order to assess whether there is enough available/vacant land and building space to meet the foreseeable future needs of potential users, including those currently on site. More specifically for the development site s property, this study looks at the total number of leasable spaces that are on the property, rent levels, sizes of units, type of space and the number of tenants currently on site. BAE then assesses the availability of comparable spaces in the area for small, low rent, and diverse business types, based on information from the client, local brokers and industrial property owners, and staff for Arcata and surrounding jurisdictions. It should be noted that this memorandum does not include any analysis of the proposed use of the site for student housing. Current Conditions at Site At present, the site, at 2905 St. Louis Road, is commonly known as the Craftsman s Mall. The site is occupied by several older industrial buildings, storage containers, mobile homes, and other stored items. As noted in the Staff Report for the Arcata City Council Meeting of San Francisco Sacramento Los Angeles Washington DC New York City th St., Suite nd St., Suite A 706 South Hill St., Suite I St. NW, Suite West 27 th St., Suite 10W Berkeley, CA Davis, CA Los Angeles, CA Washington, DC New York, NY

2 November 4, 2015, the property has been the subject of numerous zoning and building code violations and abatement proceedings over the last 10+ years. According to a news item from the Arcata Eye from 2011, the City s Community Development Director called the property one of the longest-standing enforcement projects that we have in the City. 1 Furthermore, according to the same news item: Walls, plumbing, electrical and mechanical installations were way out of code, posing serious safety issues. Wastewater was being discharged into a wetland behind one of the buildings. Rotten posts hold up a structure with businesses inside. Windows were cut into a firewall. Ungrounded metal shipping containers are wired for electricity. Buildings had been subdivided into smaller rooms for woodworking, welding, auto repair and fertilizer storage. There are exposed electrical panels, unsecured oxygen tanks, a ceiling and walls made of flammable plastic tarps and sheeting, even outdoor electrical outlets installed on a fence. 2 The proposed project will entail the removal of all the existing uses and demolition of all structures. According to information obtained through an interview with the owner and legal representative, as of March 2016, there were 28 rentable spaces at the Craftsman s Mall. Fifteen of them were indoor spaces averaging 600 square feet, and had monthly rents ranging from $450 to $550, or $0.78 to $0.95 per square foot. There were no indoor vacancies. In the interview, the main building on site was described as a pole barn subdivided into small shop spaces, and it was acknowledged that the buildings onsite needed significant repairs, including to the substandard electrical system. Outdoors, there were 13 rentable areas, averaging 1,000 square feet, renting monthly for $375 to $550, or $0.35 to $0.55 per square foot. Three of these rentable areas were vacant. Some of these spaces were occupied by shipping containers, either brought in by tenants or belonging to the Craftsman s Mall owners. Based on the interview, the typical tenants onsite were described as artisanal businesses such as glass blowers, welders, and mixed media wood workers. Additionally, the property was being used by small independent contractors for storage of tools, trucks, and other implements of entrepreneurship. There is an onsite manager during daytime business hours, and marijuana cultivation and onsite residence of tenants is prohibited. Industrial Market Overview Employment Trends Demand for industrial land and buildings is linked to employment in certain economic sectors, particularly construction, manufacturing, wholesale trade, and transportation, warehousing & 1 Long-Running Craftsman s Mall Enforcement Imbroglio Resolving December 26, 2011, Kevin L Hoover, Arcata Eye, December 26, Ibid. 2

3 utilities. In Humboldt County, these sectors have been in decline over the last decade, as shown in Table 1 below. Overall employment in the County declined by 3.7 percent between 2005 and 2015, but for these four sectors, nearly one-third of jobs (2,660 jobs) were lost. In comparison, the state decline for these three sectors combined was only 7.7 percent. The decline in manufacturing is a long-term trend in Humboldt County; while wholesale and transportation/warehousing/utilities employment has remained relatively stable and construction employment is approximately 80 percent of 1990 levels, manufacturing employment declined by nearly two thirds from 5,680 jobs in 1990 to only 2,010 jobs in Even though Arcata has a high concentration of jobs in education due to the presence of the University, Arcata also has a high concentration of workers in the manufacturing sector, with 27percent of the county s manufacturing jobs in contrast to only 19 percent of all jobs (see Table 2). Overall, the construction, manufacturing, wholesale trade, and transportation, warehousing & utilities sectors account for 16.3 percent of the City s jobs, in part because construction employment in Arcata is a low proportion of the County relative to overall employment. Future employment growth in Humboldt County is expected to be modest, as shown in Table 3. Overall wage and salary employment is only projected to grow by 5,400 jobs between 2015 and 2040, at an annual average rate of only 0.4 percent; in contrast, statewide growth is project at 1.0 percent annually, more than twice the rate of Humboldt County. Manufacturing is only projected to grow at 0.3 percent annually, adding only 180 workers over the 25-year period, such that the County will still have far fewer manufacturing jobs in 2040 than it had 50 years earlier. While the transportation and utilities sector is slated for more rapid growth, the projected growth is an addition of 540 additional workers in this sector between 2015 and Construction employment is projected to remain at current levels. The historic decline in the sectors using industrial land in Humboldt County and the anemic projected long-term recovery are indicators of weak demand for industrial land over the next few decades. While some users may require newly constructed facilities, vacant or underutilized properties such as older mills and warehouses may be able to absorb much of the demand. 3

4 Table 1: Employment by Industry Humboldt County Change, Industry Sectors # % # % # % Farm 1, % % (290) -24.6% Mining and Logging % % (70) -17.9% Construction 2, % 1, % (660) -27.5% Manufacturing 3, % 2, % (1,670) -45.4% Wholesale Trade 1, % % (160) -15.1% Retail Trade 7, % 7, % (140) -1.9% Transportation, Warehousing & Utilities 1, % 1, % (170) -12.2% Information % % (200) -28.6% Financial Activities 1, % 1, % (30) -1.8% Professional & Business Services 3, % 2, % (610) -18.5% Educational & Health Services 6, % 8, % 1, % Leisure & Hospitality 5, % 5, % % Other Services 1, % 1, % % Government 13, % 13, % % TOTAL 50, % 48, % (1,860) -3.7% California Change, Industry Sectors # % # % # % Farm 378, % 423, % 45, % Mining and Logging 23, % 29, % 5, % Construction 905, % 727, % (177,900) -19.7% Manufacturing 1,505, % 1,291, % (213,300) -14.2% Wholesale Trade 673, % 721, % 47, % Retail Trade 1,659, % 1,663, % 3, % Transportation, Warehousing & Utilities 487, % 554, % 66, % Information 473, % 483, % 9, % Financial Activities 920, % 797, % (122,600) -13.3% Professional & Business Services 2,162, % 2,493, % 331, % Educational & Health Services 1,834, % 2,456, % 621, % Leisure & Hospitality 1,475, % 1,830, % 354, % Other Services 505, % 545, % 40, % Government 2,420, % 2,458, % 38, % TOTAL 15,423, % 16,474, % 1,051, % Note: Includes only wage and salary jobs. Sources: CA Employment Development Department; BAE,

5 Table 2: Arcata Employment by Sector as Share of County Employment Arcata Arcata Humboldt County as % of Industry Sectors # % # % County Agriculture, forestry, fishing and hunting, and mining % 2, % 5.8% Construction % 4, % 8.4% Manufacturing % 2, % 27.0% Wholesale Trade % 1, % 19.5% Retail Trade 1, % 7, % 15.3% Transportation, Warehousing & Utilities % 2, % 17.1% Information % 1, % 17.5% Financial Activities % 2, % 14.8% Professional & Business Services % 4, % 17.9% Educational & Health Services 3, % 14, % 25.6% Leisure & Hospitality 1, % 7, % 24.3% Other services (except public administration) % 3, % 14.4% Public administration % 3, % 10.3% Armed forces 1 0.0% % 0.7% TOTAL 10, % 57, % 18.8% Note: Categories vary slightly from previous table due to different source data. Includes all workers, including self-employed. Data from the American Survey is based on a sample collected continuously. The data here is based on a 5-year sample from 2010 through Sources: U.S. Census, American Community Survey; BAE, Table 3: Humboldt County Employment Projections, Annual Industry Sectors % Growth Farm , % Construction 1,570 1,530 1,540 1,540 1,570 1, % Manufacturing 2,080 2,170 2,190 2,220 2,240 2, % Transportation & Utilities 1,320 1,430 1,540 1,650 1,750 1, % Wholesale & Retail Trade 8,080 8,290 8,410 8,500 8,610 8, % Financial Activities 1,620 1,700 1,740 1,800 1,840 1, % Professional Services 2,680 2,860 3,010 3,150 3,260 3, % Information % Health & Education 8,120 8,320 8,360 8,390 8,560 8, % Leisure 5,330 5,390 5,350 5,350 5,370 5, % Government 13,830 14,320 14,490 14,720 14,960 15, % Total Wage and Salary 48,270 49,790 50,610 51,460 52,490 53, % Note: Categories vary slightly from previous tables due to different source data. Includes only wage and salary employment. Source: California County-Level Economic Forecast , prepared for the Economic Analysis Branch, Office of State Planning, California Department of Transportation, prepared by the California Economic Forecast. 5

6 Existing Inventory One measure of the availability of industrial property in Arcata is from the City s General Plan; according to the Land Use Element of the Arcata General Plan: 2020, Arcata has two land use designations covering industrial uses: Industrial Limited (I-L) and Industrial General (I-G). The I-L land use designation is intended for light manufacturing and limited commercial uses. The I-G designation is intended for more intensive uses, such as heavy manufacturing including large- scale wood processing and storage, and includes uses that may generate noises, odors, and traffic that are incompatible with residential and most commercial uses. According to the Land Use Element, Arcata has a total of 349 acres of I-L land and 214 acres of I-G land within the City and its Sphere of Influence, for a total of 563 acres of designated industrial land. The proposed project site thus constitutes less than two percent of the industrial land within the City and its Sphere of Influence. In Eureka and its Planning Area, there are an additional 2,000+ acres designated for industrial uses. 3 Much of this acreage is found on the Samoa Peninsula, and some is designated as coastal-dependent industrial (CDI), where the use is restricted to tenants such as shippers, fuel terminals, fishing, and aquaculture dependent on access to Humboldt Bay. There are currently discussions related to the need to remove the CDI designation, if even for interim uses, since the demand from these kinds of users is well below the supply available. 4 To assess current market conditions for industrial real estate in the Arcata area, BAE contacted and interviewed local brokers and city staff, conducted Internet research, and accessed CoStar, a subscription service that maintains a database of commercial properties throughout the United States. It should be noted that in contrast to larger and more active commercial real estate markets such as the San Francisco Bay Area, where multiple major national brokerage firms track inventory and publish reports on market conditions, Humboldt County is a much smaller market with few active brokers. According to interviews with the two key firms representing industrial properties in the Arcata region, many property owners market properties without the use of a broker (e.g., Craigslist) and as a result these properties may not appear in CoStar or broker listings. For instance, the Craftsman s Mall property itself is not listed, and does not use a broker when leasing space. Furthermore, due to the decline in local resource-based industries over the last 25 years and the resulting lack of demand, there are properties that are not actively marketed but could become available if demand increases. As noted above, due to the small and less competitive nature of the Humboldt County commercial real estate market, CoStar data should not be considered a listing of the entire area inventory, but the data set still provides an overview of general market conditions. CoStar listings include a total of more than 2.4 million square feet of building space classified 3 City of Eureka General Plan Update, Community Background Report, prepared by ESA, June See, for instance, Bay needs interim use zoning for economic development, Richard Marks, January 29, 2016, Eureka Times Standard. 6

7 as industrial in Humboldt County, including manufacturing, distribution, and warehouse space (see Table 4). The listed buildings are on parcels totaling approximately 400 acres. Over half of the total reported inventory is in Arcata, with nearly one-third in Eureka, and the remainder scattered around the Humboldt Bay region. Arcata shows limited vacancies with a rate of 2.5 percent, while Eureka has a much higher vacancy rate of 9.2 percent, with over half the vacancies in the CoStar inventory in Eureka. Overall, the CoStar inventory for the region shows a vacancy rate of 5.5 percent, with approximately 133,000 square feet of space available. Table 4: Industrial Market Inventory Listed by CoStar, Arcata-Eureka Area Building As % of Available As % of Vacancy Location Area (S.F.) Total Space (S.F.) Available Rate Arcata 1,345,170 55% 33,200 25% 2.5% Blue Lake 13,057 1% - 0% 0.0% Eureka 755,046 31% 69,759 53% 9.2% Fields Landing 10,168 0% 5,000 4% 49.2% Fortuna 143,874 6% - 0% 0.0% Loleta 111,841 5% - 0% 0.0% McKinleyville 37,534 2% 13,642 10% 36.3% Samoa 11,042 0% 11,042 8% 100.0% Total 2,427, % 132, % 5.5% Note: Includes only space in CoStar inventory, which does not necessarily include all space either occupied or vacant. Source: CoStar 2016; BAE, 2016 For Arcata, the available space listed in CoStar is associated with two properties, one with 21,420 square feet of space, and one with 11,780 square feet. The larger available space is subdivided, with the smallest space being 5,420 square feet. In Eureka, the available space listed in Costar is on seven properties, ranging from 2,400 square feet to 20,539 square feet. The smallest available individual space was 2,353 square feet. Since the CoStar dataset is not all-inclusive, BAE also looked at Craigslist, and one broker provided an additional set of listings from MLS of available property in the region. Because the Craftsman s Mall tenants are in small spaces, the Craigslist query was broadened to include retail and commercial spaces, some of which might be suitable for some of those tenants. The listings confirmed that some properties are not listed on CoStar; 27 properties were not in the CoStar industrial database. The Craigslist/MLS listings were generally smaller than the available spaces reported by CoStar. In Arcata, the seven listed spaces ranged from 1,218 to 10,000 square feet; in 7

8 Eureka, spaces ranged from 292 to 6,000 square feet. The smaller listings tended to be retail/commercial spaces. As with CoStar, there were more listings in Eureka (19) than in Arcata (seven). For spaces of 2,000 square feet or less, rents ranged from $0.89 to $1.23 per square foot in Arcata and from $0.60 to $1.14 in Eureka. Additionally, the Craigslist/MLS listings included outdoor storage space ranging from $0.05 in Samoa to $0.20 per square foot in Arcata. Key Informant Interviews In addition to interviewing the current property owner and their legal representative, BAE conducted phone interviews with commercial brokers at the two firms most active in the Arcata and Eureka area, as well as city staff in Arcata and Eureka. The brokers included Scott Pesch and JB Mathers of CB Commercial Partners Real Estate, and David Wells of Wells Commercial Real Estate and Investments. Several of the properties listed as available for lease by CoStar, Craigslist, and MLS are represented by these brokers. BAE also interviewed David Loya, Arcata s Community Development Director, and Andrew Whitney, Eureka s Economic Development Program Manager. Following is a summary of those interviews. Key Points from Broker Surveys According to the brokers, there is a large supply of available industrial-zoned land in and around Arcata. Overall industrial vacancy rates were estimated at five to 10 percent. However, there is a more limited supply of smaller built out space of less than 1,000 square feet; one broker reported a waiting list of clients ready to move into a smaller space. Rents for spaces in the range of 1,500 square feet were estimated at between $ 0.70 and $0.75 per square foot. The Creamery District was identified as a potential site for some of the current tenants of the Craftsman s Mall, but the Creamery District is not suitable for additional heavy industrial uses as it transitions to an arts district from more historic industrial uses. One of the brokers stated that while there is a limited supply of smaller spaces, there are larger properties where the owners may be willing to subdivide the space, such as some of the warehouse/industrial space available in Samoa. The brokers identified the marijuana industry as a key driver of demand in Arcata. According to Wells, marijuana growers are preparing for possible voter approval of the legalization of recreational marijuana in California (on the November 2016 ballot) and are tying up lots of spaces. Despite strong demand, though, high construction costs combined with relatively low rents make it unlikely that the area will see any significant new development in the near term. Key sites identified by the brokers to accommodate future industrial uses included Little Lake (owned by City of Arcata), with 30 acres of under-developed land, the Greenway Building, Aldergrove Industrial Park, Samoa Boulevard (near the Creamery District) with an underutilized former mill site of approximately 20 acres, and the Louisiana Pacific Site. 8

9 Interview with David Loya, Arcata Community Development Director According to Mr. Loya, Arcata has long had the lion s share of manufacturing jobs in the County (this is confirmed by the analysis above, where Arcata has a higher proportion of manufacturing jobs than other cities). He believes that the City helped make this possible with the development of the Aldergrove Industrial Park; additionally, another City-owned 20 acre industrial park is in the works (still in planning/conceptual stage) with development commencing in three to five years under a best-case scenario. Loya identified a recent rise in niche micro manufacturing and maker spaces, with the regional economy transitioning from heavy industrial/manufacturing. The City has concerns about the conversion of industrial land to other uses. A main concern is regarding where tenants will relocate, in light of recent rezonings of industrial lands. The City recently rezoned the Creamery District to transition it from industrial to a more mixed use artistic area. While Mr. Loya does not disagree that there may be spaces in that area that are appropriate for Craftsman s Mall tenants, he stated that the city s vision for the area may not align with some of those uses. One key factor driving industrial land use is Humboldt County s marijuana industry, given trends toward the relaxation of prohibitions on marijuana use, from today s medical marijuana to the possible legalization of recreational use as has occurred in several other states. As the industry becomes more open, Arcata is positioning itself to capture a share of the activity, creating a Medical Marijuana Innovation Zone, which is being established as the only area in the City where these activities will be permitted. It was noted that the marijuana industry is looking for larger spaces than those found at the Craftsman s Mall. Interview with Andrew Whitney, Eureka Economic Development Program Manager Mr. Whitney was contacted to get an overview of industrial market conditions in Eureka. He noted a number of comparable or potentially available properties in Eureka, including smaller commercial/industrial spaces on Jacobs Avenue, small commercial and retail spaces in Old Town, the Warehouse District, the Hillficker/Trusdale industrial district south of the mall, and the industrial/commercial area west of 101 and north of Costco. Properties available for redevelopment include the Brainard Mill site, the Balloon Track, and the sawmill between Washington and 14 th, which is still operating but may face closure in the future. One key area of concern is the Samoa Peninsula, where there is ample land and vacant space; however, the area is zoned for coastal dependent industrial land uses which seriously restricts uses, and the zoning is difficult to change because of Coastal Commission involvement. There are an estimated 1,500 acres of land designated as coastal dependent industrial land use in the unincorporated County, and Mr. Whitney states that it would likely take two to three years to rezone any of this property. Marijuana industry-related outcomes are dependent on whether the City will allow those uses. Currently, it is unclear and unknown where and what uses will be allowed. 9

10 Summary of Findings Coleraine Capital Group and Amcal Equities have proposed a residential development that would remove the existing buildings and tenants from the Arcata property commonly known as the Craftsman s Mall. This former 9.5-acre mill property has been subdivided into smaller spaces and lot areas that are utilized by a mix of small businesses. The City has requested this analysis due to a concern about the ability of these tenants to find other suitable space, and the impact on the City s overall inventory of industrial land. Based on the analysis above, it appears that the reuse of this parcel for residential use would have little impact on the overall availability of industrial land supply in Arcata, as it constitutes less than two percent of the industrial land in the City. The manufacturing sector has seen a sharp decline in the region over the last 25 years, and Arcata has multiple properties that are no longer in their original use (e.g., as mills). Arcata and Humboldt County overall are projected to have very limited employment growth in sectors generating demand for industrial land over the next 25 years. Furthermore, there is additional land available in Eureka that competes to meet regional demand. The available listings show several properties with outdoor storage space available for prices similar to the rates at Craftsman s Mall, indicating that these tenants should be able to find alternative space. While the supply of existing industrial building space in Arcata shows limited vacancies in currently on-market space, other nearby communities have a larger inventory of available space, and there may be vacant properties that could come back onto the market in response to demand, as well as vacant industrial land available to meet any additional demand in improving market conditions. Vacancy rates are much higher in Eureka, which has a sizable inventory of industrial space. While Arcata is designating one area for potential future use by the marijuana industry (albeit not restricting other uses), these users are looking for larger spaces than those used by the tenants at the Craftsman s Mall. Overall, while there is currently a limited supply of smaller spaces, interviews with brokers indicate the potential to subdivide some of the larger vacant properties. Additionally, some of the tenants may be able to find space in underutilized retail/commercial spaces. Ultimately, the rents offered at the Craftsman s Mall are either below or at the low end of market rents based in part on the property not being maintained to code or with proper permits. Current rent levels would not be sustainable at other properties or even long-term at the Mall itself. Based on broker information, as well as the interview with property owner and her attorney, other space is available in the area that could be subdivided and used by the current Craftsman s Mall tenants if demand is demonstrated at viable market rent levels. 10