Newmark PCG

February 9, 2021

Santa Barbara’s history is full of infill transformation with the film industry, the oil industry, and tourism. The Funk Zone is a major attraction to residents and tourists alike. Artists, winemakers, and restaurateurs transformed the Funk Zone into a highly walkable, creative mix of uses due to its historical marine structures and repurposed industrial lots that have been revitalized into a mix of creative uses. The Funk Zone will continue to benefit as the population of the surrounding area increases partially due to the current dense urban exodus and the constrained competition as local planning guidelines limit urban sprawl.

The Funk Zone is a neighborhood in Santa Barbara, California and it is next to the beach, Stearns Wharf, and Santa Barbara City College. The Funk Zone is defined as the area bounded by State Highway One to the North, Garden Street to the East, East Cabrillo Boulevard along the coast, State Street to the Southwest. The Newmark Private Capital Group has seen the demand in the Funk Zone among local investors through our marketing process of The Platform, a 32,133 square-foot flex building.

The Funk Zone Supply

Industrial/FlexOfficeRetail
Buildings291433
Avg. Building Size8,4105,6574,765
Inventory (SF)243,87679,201157,143
Vacancy (SF)11,293020,116
Vacancy (%)4.6%0.0%10.9%
Availability (SF)11,293023,451
Source: Newmark Private Capital Group & CoStar Research, 2021

The Funk Zone Office & Flex Demand

The Funk Zone is an entirely commercial district with a mix of industrial, flex, office, retail, and hospitality buildings mainly occupied by local businesses. The flex and office buildings benefit from a long list of restaurants, breweries, and other retail locations within the Funk Zone and the adjacent neighborhood, the Lagoon district. The Funk Zone is adjacent to the beach, the harbor, and Stearns Wharf. These attractive amenities draw tourists and residents alike and are supported by hotels, including the new Hotel Californian that was developed in 2017. In the last couple of years, many new artisan shops, galleries, and restaurants have opened in the Funk Zone as interest in the community continues to grow. Among the many restaurants, the Funk Zone is also home to the famed Urban Wine Trail, a collection of 33 wine tasting rooms most within walking distance.

Map of the tenants in the Funk Zone

Despite the pandemic, the Funk Zone’s flex and office space had a very low vacancy rate in 2020 at just below 5%, which is up from the lowest rate of 2.1% in 2019. Historically, the retail vacancy rate in the Funk Zone has been at or near zero before. However, the retail vacancy rate in the fourth quarter of 2020 increased to nearly 11%. The pandemic has drastically affected small businesses, especially restaurants, which have shut down during California’s lockdown.

Although, this level of retail vacancy occurred before in 2010, a result of the 2008 financial crisis, and the Funk Zone remained a local destination despite the increase in vacancy. After a crisis, demand continues to return to the Funk Zone due to its proximity to the adjacent Amtrak location for easy tourist access to community attractions such as the beach, Stearns Wharf, and the harbor.

Additionally, Santa Barbara’s planning guidelines and community representatives are heavily against urban sprawl to the degree that the city used to deny water utility access to projects approved by the County Board of Supervisors. Developers focus on renovation and infill development rather than new construction of subdivisions. Since development is constrained by natural (mountains and ocean) and political barriers, the demand for space in the Funk Zone remains high.

For more information about the adjacent neighborhood, The Lagoon District, see the Private Capital Group’s separate report.

The Funk Zone is an eclectic waterfront neighborhood at the epicenter of Santa Barbara’s arts, innovation, dining and tourism hub.

Ryan Tetrault, Associate at Newmark Private Capital Group

Population Growth in Santa Barbara

Historically, Santa Barbara’s population has grown at the same rate as the average for California; however, the pandemic has heightened awareness of population density and the related health risks during an outbreak. Over the past year, there has been a population exodus from the densest urban areas in the United States to lower density urban, suburban, and rural communities. Unsurprisingly, Los Angeles and New York have been most affected by the exodus.

In California, Santa Barbara has been one of the most popular destinations for movers from Los Angeles and San Francisco. Over the past year, the net inflow of population to Santa Barbara increased by 124%. As many people look to escape a dense urban metropolis, Santa Barbara, with open space, plentiful beaches, and lower population density, is far more appealing than many other communities. And since some companies have already announced post-pandemic work from home policies, employees will continue to have the option to live farther away as the five-day work week changes.

Local business will benefit from new patrons; however, the Funk Zone will not receive any direct increase in population as there are not any multifamily projects within the Funk Zone boundaries.

City of Santa Barbara Demographics

PopulationPercent Population GrowthMedian IncomePercent Median Income Growth
201088,436
202091,1303.0%$84,540
202592,2211.2%$93,82511.0%
Source: U.S. Census Bureau

The Funk Zone Demographics

PopulationPercent Population GrowthMedian IncomePercent Median Income Growth
2010104
20201051%$71,980
20251050%$80,40712%
Source: U.S. Census Bureau

The full report includes, among other information, a map of the major ownership groups, the current development pipeline, and recent sales and leasing activity in Santa Barbara.

Disclaimer: The information contained in this article is provided for general informational purposes only, and should not be considered or treated as legal or tax advice and represents only general information that may or may not be applicable to the reader’s particular situation. The reader should consult its own attorney and/or tax advisor if specific guidance, information, or advise is required.

About the Author(s)

Sean Fulp is based in Los Angeles and leads the Newmark Private Capital Group, which focuses on selling small and mid-sized office, industrial and multifamily properties throughout the Western U.S. Ryan Tetrault is an Associate on the Newmark Private Capital Group and has been involved in the disposition and marketing of over $800 million worth of office, industrial, and retail property across the Western United States.