Developer Tries to Salvage Commercial Property by Converting to Self-Storage

Posted on Jan 29 2010 - 8:10pm by John Stevens

Last night Redtree Properties, a Santa Cruz, California real estate developer, went before the City Council in Capitola, California, to discuss its proposal to turn vacant office space into self-storage units. The office space, which is located next to a shopping mall, is not zoned for self-storage. The office spaces could not be converted to self-storage unless the city rezones the area or amends the neighborhood commercial zone law to allow self-storage. But the Capitola Planning Commission is in favor of the idea. 

The office complex, which is located at 809 Bay Ave in Capitola, next door to the Nob Hill shopping mall, was last occupied in August 2008. It occupies 37,232 square feet of space, which Redtree plans to convert to 394 self-storage units.

The last tenant was the county’s Office of Education. But the Office of Education decided to move to Santa Cruz, opting not to renew its $37,000/month lease, which will expire this summer. Until the lease expires, the Office of Education is continuing to pay the rent for its old offices. At $37,000/month, once that lease expires, Redtree will be losing $444,000/year if the space remains vacant. “When they moved,” said Redtree’s managing director, Craig French, “we were just entering this recession….We expected to be able to sign a lease within six to 12 months.”

At the time that the Office of Education made the decision to move (in 2007), County Superintendent of Schools Michael Watkins was hoping to find a business to which the county could sublease the space. In fact, he had lessees who were interested. But by the time the move actually occurred, the recession was beginning and the lessees lost interest. Instead, the county has by now made nearly $700,000 in duplicated rent payments since the Office of Education moved. 

The office vacancy rate in the Capitola area was eight percent last year, and was even higher in the rest of the county. “Office space is lower than retail square footage right now and therefore least desirable,” said Gillian Greenfield, who works for Hirsch & Associates, a local commercial broker. She continued, “Storage units historically have pulled in the highest return per square foot than any other type of rental product and are the least expensive to develop.”

French told the City Council that Redtree plans to spend between $1 million and $1.5 million to build the self-storage units and a sales office, and to install security cameras. He also presented the results of a study done by a consultant, who concluded that the space would be feasible for self-storage because it is highly visible, there is little competition in the area, and there is currently a strong demand in the community for self-storage. 

Not everyone at the meeting in Capitola was enthusiastic about the possibility of developing self-storage next to the mall. Planning commissioner Stephanie Harlan feared that the city would lose sales tax revenues. But she said she could not think of any other alternative for the space, and French pointed out that the city would also gain property tax revenues, since the Office of Education had been exempt from property taxes. Senior planner Ryan Bane thought the loss of the sales tax revenue could be remedied by requiring the business to make a payment instead, but wondered whether Capitola’s small-town atmosphere would be altered by the presence of a self-storage facility. Bane also, along with Greenfield and commissioner Rob Burke, raised the issue of access to parking. Bane and Burke feared traffic problems might occur, but Burke also noted that topographical features would make it hard to add another entrance or exit. 

“Parking is critical wherever a business decides to locate; however, ironically it’s the first thing a landlord tries to overlook when it comes to developing a piece of property,” noted Greenfield. 

Overall, the planning commissioners seemed to support Redtree’s proposal. They said that they would insist on low-noise rolling doors, and security cameras. They also wanted to see the complex’s white picket fence extended to make the property look nicer.