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Pacific Coast Business Times: Industrial hot, office space is not

March 01, 2019
Santa Barbara, California – Published 3/1/2019
By Annabelle Blair

Growing demand for industrial space and softness in the office market were the dominant themes in commercial real estate at the third annual Santa Barbara and Ventura County Market Trends Seminar.

As industrial demand increases, values will follow, said panelist Jim Turner, a broker with Radius Commercial Real Estate in Santa Barbara County. His predictions for the area included a market driven by mutual buyer-seller demand and CAP rates following an uptick of interest rates and compressing property values.

The event was held Feb. 26 in Ventura and hosted by the Southern California Chapter Appraisal Institute.

National and regional experts agreed that disinterest in office space is rising as the traditional businesses’ square footage ratio per employee decreases and e-commerce drives up demand for warehouse and industrial space.

A low 2.5 percent vacancy rate in the San Fernando Valley is poised to push developments into Simi Valley, Moorpark and the Conejo Valley, said panelist Mike Tingus, president and principal at Lee & Associates for Ventura and North Los Angeles County areas.

“We would hope that we would see more push for migration out into Ventura County and obviously more construction,” Tingus said, noting that Camarillo and Oxnard will become top destinations as companies look to expand and can’t find sites in the San Fernando Valley.

Ventura County has fairly tight vacancy rates, which is bumping up off-market deals — only because brokers have taken to cold calls, trying to be competitive in filling requests.

“If you can get a property, fix it up and make it look decent and modern, you’ll get the building leased pretty much right away,” Tingus said, noting that in the current industry market in Ventura County, landlords are “in the driver seat” and tenants need to start looking early.

Buildings that contain office and industrial space are particularly attractive, he said, because a buyer can throw out the office space if they don’t want it and industrial space is easily renovated.

As industrial demand increases, values will follow, said panelist Jim Turner, a broker with Radius Commercial Real Estate in Santa Barbara County. His predictions for the area included a market driven by mutual buyer-seller demand and CAP rates following an uptick of interest rates and compressing property values.

Meanwhile, in Northern Santa Barbara County, agricultural demand is calling the shots for commercial spaces and land, said panelist Tom Davidson, a broker with Lee & Associates in the North County area.

“We’re not a distribution market in Santa Maria,” he said, contrasting the area with the warehouse demand in Ventura County. The softest part of the industry lies in office space, which mostly involve less than 5,000 square feet.

In terms of the land and facility prices in Lompoc, the cannabis industry is pushing up commercial values in an area previously taken over by the wine industry 15 years ago, he said.

Land sale prices have risen to $175 to $200 per square foot as the new industry grows, up from $60 to $80 per square foot. And prime agriculture land that used to be $35,000 per acre is now going for $50,000 to $60,000 per acre, he said.

As a whole, the investment market is active — despite interest rates clipping up — and rents are rising with the high demand, Tingus said. But both single and multi-family residential products are needed to sustain commercial real estate growth.

Although currently strong, the industry is poised for a slowdown in the next few years across property types, said industry experts.

Housing concerns are limiting businesses’ abilities to expand in the region, and limited labor growth and hesitancy about the stability of the U.S. economy past 2020 are set to contribute to the anticipated slowing.

This includes rent prices, which are forecasted to accelerate a bit before beginning to decline over the next couple years, said Rafael De Anda, senior market analyst for CoStar Group.

“In real estate one of the most important factors is where population has been growing in the past and how that’s affected change,” he said.

Although millennial numbers have increased, Ventura and Santa Barbara counties have strong aging populations, De Anda said. In Ventura County, population growth was at 0 percent last year due to the number of people moving away. Santa Barbara County fared better with slight migration growth, likely due to students coming to UC Santa Barbara, he said.

A combination of slow population growth, a lack of housing supply for workers and low unemployment rates making skilled workers hard to find and will eventually put pressure on growth in the region with impacts to commercial real estate sales and leases, panelists and speakers said.

In both counties, the combined population is estimated to reach 1.4 million by 2030, said Miguel Delgado Helleseter, professor of economics and director of the Institute for Global Economic Research at CSU Channel Islands.

As population grows, so does the need for housing. Since 2010, the population has grown faster than available housing, Helleseter said. The average number of people per household in Ventura and Santa Barbara counties in 2010 was 3.7.

If the housing supply doesn’t keep up with population growth, household sizes will increase or prices will go up, he said.

“If you look at 2010, we were already in tight quarters, if you will,” he said. “There’s no indication that we are going out of our way to building housing, and yet people want to live here.”

Current house prices in both counties are well above the state average, and Ventura County median sale prices are above Santa Barbara County’s — although the price growth in Santa Barbara County is higher overall, he said.

Helleseter also noted that housing affordability is dependent on interest rates, which are picking up.

In terms of the longevity of the industry’s current market, Tingus said he predicts “smooth sailing through 2020.”

When manufacturers and companies producing new products begin to decline, a decline in office, retail and investment markets typically follow before recession, he said.

“In the three recessions I’ve been in that’s been probably the single best indicator of where we are in that cycle,” he said.

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