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Pacific Coast Business Times: Marijuana industry boosts demand for tri-county industrial space

November 16, 2018
Santa Barbara, California – Published 11/16/2018
By Annabelle Blair

Demand is growing in Santa Barbara County for industrial spaces and especially facilities for the burgeoning marijuana industry.

Industrial space rates are up, almost neck-in-neck with office space rates, in an interesting twist for the commercial real estate market, reported the Radius Commercial Real Estate team at the 2019 Real Estate and Economic Forecast in Santa Barbara on Nov. 13.

Tech office rates are rising, while rates for traditional commercial spaces remain solid, said Gene Deering, Radius’s newest partner, whose promotion was announced at the event.

But overall economic growth is still stymied by a lack of political will to build more housing in coastal communities, said a leading California economist.

When it comes to industrial space, the increase is driven by emerging millennial workplace trends, especially in the budding tech sector, which embraces open co-working spaces with large windows and roll-up doors.

This is accompanied by less demand for office space, which means more workers per square foot and a higher demand for parking, Deering said.

Demand for industrial space has been rising across the region with Ventura County markets such as Simi Valley also reporting strong demand for locations and limited opportunities for new supply.

Santa Barbara County is a strong player in the marijuana market, with 10 percent of the state’s commercial sales this year related to cannabis farming, production and research and development. Virtually all of the transactions are in cash and a lack of traditional financing creates a challenge for the industry, reported Radius Partner Brad Frohling.

When a cannabis retailer on Chapala Street in downtown Santa Barbara closed, Frohling said, there were about 20 other cannabis businesses vying for the three permits available for retail in the area. The demand was so strong, he said, cannabis retailers were looking to pay exceptionally high rates for spaces.

While the question remains on whether or not the marijuana industry will be ultimately sustainable in the region, he said, it’s definitely bumping up land values for properties meeting the appropriate growing criteria in both the north and south county areas.

In terms of permits and businesses, Santa Barbara County is leading the state, according to data from the California Department of Food and Agriculture.

“Don’t be surprised in a couple years if people say, ‘You guys (Santa Barbara County) are the dominant cannabis player,’” Frohling said.

In terms of commercial real estate transactions and volume, both are slightly lower in Santa Barbara County this year due to the mudslide disasters, Frohling said, but not by a lot.

This year’s 52 transactions were worth a total of $181.9 million.

The numbers are down from last year’s in terms of both volume and transactions, with decreases of 38 percent and 31 percent, respectively.

Frohling pinned the decreases in part on a disconnect between sellers and buyers on property values as well as rising interest rates, which he pointed out are still quite low.

Also discussed at the event was the ever-present need for more housing across the state.

“Economic development in California boils down to roofs, roofs and more roofs,” said keynote speaker and economist Chris Thornberg of Beacon Economics.

He added that rent continues to climb as recent wage increases are driven by tight labor markets, where less-skilled workers who don’t hold bachelor’s degrees are being paid more. This is good for landlords, who can continue to raise rates until the supply catches up with the demand, he said.

Another consistent message on looking into the future of real estate in 2019 was land values, which are taking hits from high construction costs, rates and the regulatory environment, Frohling reported.

Low unemployment rates are also bumping up the cost of construction labor, Thornberg said, which hampers building projects — including housing in a circle of upward spiraling rent prices.

In East Ventura County, the recent fires are a humanitarian issue, not an economic one, Thornberg told the Business Times.

During the presentation, he noted that past fire recovery efforts in California cities have shown that people and businesses are resilient.

He told the Business Times that slow-growth policies are responsible for Ventura County’s sluggish economy.

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