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Market Watch: Are we feeling good yet?

October 31, 2013

View Full Report: 6th Annual Radius Real Estate & Economic Forecast

Are we feeling good yet?

2013 Radius Forecast Report
Nearly 350 attended the 6th Annual Radius Real Estate & Economic Forecast Thursday, October 31 at Fess Parker’s Doubletree Resort in Santa Barbara. The event featured keynote speaker Dan Walters, syndicated political columnist from The Sacramento Bee, and Dr. Mark Schniepp, director, California Economic Forecast.

“…interest rates are still historically low, banks have either healed or been consumed by their brethren, and business is moving or wants to move forward.”

By Steve Brown, Radius Principal Last year at this time we were asking ourselves, “Are we there yet?” Well, I suppose that depends on your definition of “there”, but it seems that in spite of the chaos and confusion in our government, the general public is ready to move on with their lives, and that includes the economy. While the Fed’s support (also known as Quantitative Easing) continues, interest rates are still historically low, banks have either healed or been consumed by their brethren, and business is moving or wants to move forward.

This includes the real estate industry. Housing has certainly come roaring back with the number of sales substantially over the previous year’s numbers. Overall, prices have stabilized and for houses that are priced right and are affordable to the majority of buyers, there are multiple offers. Whether this precedes another bubble is too soon to predict, but suffice it to say, it is cleaning up the inventory and creating a more stable environment for lenders and consumers.

Normally a six month supply in our for-sale housing inventory is considered healthy. Currently the standing housing inventory in the greater Santa Barbara area represents a three month supply based on existing sales activity, which is an improvement from the four-and-a-half month supply this time last year. This is good news for an industry that had become the anchor to our economic recovery.

Further signs of continued improvement in consumer demand for residential units locally are seen in the development of two large mixed use condominium projects. One is the Sevilla project at the bottom of Chapala Street and the other is the Alma del Pueblo project at the site of the old Safeway at Chapala and Victoria Streets. These developments will add approximately 80 residential units and seven commercial units to our inventory. While both are at the beginning of their sales offerings, reports are that consumer interest has been strong and that the majority of first phase units are in escrow. The fact that developers are confident enough in consumers to bring these projects to market is another sign of improving conditions.

Commercial real estate has experienced some of the same positive effects as investors and owner/users have become more confident in the market and, again, financing has remained a bargain. Locally, inventory has not increased appreciably due to the political and environmental constraints on development in the South Coast, so as the market heats up, buyers are looking at a shrinking supply of product to purchase. As long as that demand exists and increases, it will invariably put pressure on our prices. That has already been seen, especially for those properties that are in prime locations and possess a stable income stream.

Year to date the range of sales prices for Santa Barbara office buildings has averaged $300–$500/SF, for prime retail $500–$750/SF (State Street and immediate surroundings) and for industrial $190–$285/SF. These prices per square foot represent 11%–25% increases over the price per square foot this same time last year.

One of the continuing soft spots is commercial leasing, especially in the office sector. The total number of commercial lease transactions is down 11% from the high in 2011, and the transaction volume is down 21% since 2011. While rates have adjusted down from previous highs, the demand for office space continues to lag throughout the South Coast, especially in Carpinteria and Goleta. This may be due in part to the fact that the job market is still relatively anemic, and it is certainly due to the fact that companies are able to accommodate their client demands with fewer staff. We have technology, as well as the economy, to thank for that.

Retail and industrial leasing, on the other hand, have both shown improvement. The industrial sector has improved primarily due to the lack of inventory, especially in Santa Barbara. Retail, especially in the 700–900 blocks of State Street and along Coast Village Road, is starting to take off again and rents are climbing back from their lows. And stay tuned for the new retail product coming online from the development of the former Entrada project on State Street and Cabrillo Boulevard, the Alma del Pueblo project on Chapala and Victoria Streets, the Sevilla project on Chapala Street and the new buildings under construction at the former Turk Hessellund Nursery on Coast Village Road.

The other industry that didn’t see much press last year but has remained the darling for the last 3–4 years is the hospitality industry. According to statistics kept by the City of Santa Barbara, bed tax revenues have climbed steadily over that period with a 7.4% increase from July 1, 2012 to June 30, 2013. Hospitality experts such as STR are bullishly predicting this growth trend to continue for at least another 18–24 months.

So, are we feeling good yet? The answer is probably a qualified “Yes”. However, the market is still sensitive to the squabbles in our government and more reliant than ever on our historically low interest rates. Enjoy the ride while you can!.

View full report: 6th Annual Radius Real Estate & Economic Forecast

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