Wednesday, February 5, 2014

2013 - Santa Barbara Commercial Real Estate in Review

View over santabara town and ocean

In times of recession, Santa Barbara has lost 8% of its workforce, mainly due to the falling construction industry. However, the average listed price of commercial properties in Santa Barbara is just below half a million dollars, which is the second highest in the country.

Overall 2013 turned out to be another very strong year for Santa Barbara commercial real estate.  In 2013 there were 83 total commercial sales, coming in just shy of the 85 sales transactions of 2012. The 85 of '12 matched a 15-year high set in 2005. 

A couple of the major deals involved local restaurants. Those were the November Rusty’s Pizza purchase of a new location at 111 State St., and the December purchase of Blush Restaurant & Lounge. The largest of them all was the sale of the Funk Zone’s Anacapa Project at 137 Anacapa St. in October for $11.7 million to a local investor (over $700/sf).  The businesses on this property include The Lark, Figueroa Mountain Brewing and seven other tenants.  This is the highest price seen in the area since 2007.

Despite the notion that Summer is a slow season for many businesses, it was actually quite active in the commercial real estate sector. Several larger transactions were closed over the summer including both commercial office leases, and a few substantial commercial property sales.

In August, nearly 27,800 SF was leased at 419 State Street, formerly occupied by Territory Ahead.   Further north, 6144 Calle Real leased the entire second floor of the highly recognized Spectrum Building. 

We see this as encouraging, that in spite of reticence in the business sector to engage in risk, our local area economy seems to be fairly self-confident.

There were some eye-popping investment sales, indicating an unabated interest in diversification from the equities markets. Capitalization rates remain at all time lows, and investors seem willing to accept the risk of real property ownership as an alternative to a trifling stock market. Many feel investment in “bricks and mortar” is an opportunity to hedge inflation, and while long absent, many fear how current fiscal policy can be other than inflationary. 

The Funk Zone continues to attract enormous interest from local and out of town investors, including the above-mentioned sale of the Anacapa Project. It’s easy to see why, with the vibrancy of the "local scene" emerging from the gentrification of this formerly sleep area.

Santa Barbara     Vacancy                       Avg Ask Rate
                          Q4 '12    Q4 '13             Q4 '12   Q4 '13    

Office/R&D        5.70%     5.20%             $2.39     2.54
industrial            1.20%    1.30%             $1.33    $1.39
Retail                 1.50%    2.10%             $3.17    $3.54

In the last year, we can see that the vacancies have dropped in Office/R&D over the last year.  However, they have grown slightly in the industrial sector while more noticeably in Retail here in SB.  Not surprisingly though, in one of the most expensive markets in the country, the average ask rate has increased across the board.

Bright spots in the technology sector are in evidence, with Sonos and others setting the pace of expansion primarily focused on the downtown area of Santa Barbara. Citrix On-line, made a key property acquisition late in the period, and purchasing nearly 160,000 square feet of Goleta office space in 3 buildings, increasing their footprint in our community. The same is apparent with Deckers Outdoor Corporation, growing into their new 200,000 square foot 14 acre headquarters later this year.

Overall, 2013 turned out to be a strong recovery year on the South Coast.

In 2014, more and more investors are going to be competing for a limited supply of real estate. Look for some potentially high profile properties to exchange hands.  

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