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Pacific Coast Business Times: Retail leads South Coast CRE recovery as office market lags

November 09, 2012

Retail leads South Coast CRE recovery as office market lags

Santa Barbara, Calfornia – Published 11/9/2012
Pacific Coast Business Times
Retail leads South Coast CRE recovery as office market lags
By Marlize van Romburgh

The South Coast commercial real estate scene continues to make a strong rebound, but the lackluster office space market could throw a wrench in the recovery.

That’s the view from brokers at two of the largest commercial real estate firms in the region. Brokers from Radius Commercial Real Estate & Investments spoke at their Oct. 25 forecast in Santa Barbara, and Pacifica Commercial Realty has released its latest market report and outlook.

South Coast commercial leasing is on track to have the same number of leases this year as in 2010 and 2011, Radius agent Brad Frohling said at the conference.

As vacancy rates have dipped, rents in all three South Santa Barbara County cities—Goleta, Santa Barbara and Carpinteria—are up about 9 percent overall.

But statistics from both firms point to an uptick in office vacancy in the area. The amount of vacant office and research & development space in Goleta and Santa Barbara climbed during the third quarter, to 10.1 percent and 4.9 percent, respectively, according to Pacifica’s numbers. Demand for office space is a little slack, “although it was not an alarming increase,” Pacifica said in its report.

Pacifica says that in Carpinteria, the office vacancy fell, but still remains relatively high at 11.1 percent. Radius crunched the numbers a little differently, and actually points to an uptick in office vacancy in Carpinteria as well, to 13.7 percent, but notes that this is well below the eye-popping 32 percent vacancy rate in that market in 2001, after the dot-com bust.

Perhaps the most notable office vacancy on the South Coast market is the 27,000-square-foot building at 419 State St. that was recently vacated by The Territory Ahead.

Notable leases include Skate One, which recently leased 33,005 square feet at 30 S. La Patera Lane in Goleta. The building was vacant for more than two years. Party rental business Event Rents has leased 15,262 square feet at 1 N. Calle Cesar Chavez, in Santa Barbara’s Funk Zone.

And online education company recently signed up for 21,000 square feet of additional space in Carpinteria, bringing its total space in the city to 170,000 square feet. In fact, the fast-growing firm has been the major force driving in the city’s commercial market.

Industrial rates stayed fairly flat during the quarter, with Santa Barbara’s vacancy rate unchanged at just under 1 percent. Goleta’s industrial space market received help from Citrix, which subleased 26,600 square feet at 74-6 Hollister Ave.; Zad Fashion, which leased 13,000 square feet at 30 S. La Patera Lane; and breast implant company Sientra, which leased about 9,900 square feet at 26 Castilian Drive.

Pacifica also points to an expansion by Powell Skateboards into approximately 33,000 square feet of additional space in their existing facility at 30 S. La Patera Lane.

The new leases helped drive the city’s vacancy rate from 8.5 percent to 5.8 percent, according to Radius.
Carpinteria also continues to improve, with its industrial market vacancy rate at 6.3 percent, down from a 14 percent peak at the end of 2009.

But retail has been the real winner. Santa Barbara, the region’s major retail market, has an “unheard of” 1.6 percent retail vacancy rate and continues to see an uptick in rents, brokers said. (For comparison, the national retail vacancy rate hovers around 110.5 percent.) Luxury athletic wear retailer Lululemon is moving a short distance from its current space at the Paseo Nuevo mall to a 4,000-square-foot space at 740 State St., formerly occupied by The Peace Store. And a Sit ‘N Sleep Mattress Superstore is opening in 8,500 square feet at 314 State St., next to REI.

Commercial sales, meanwhile, suffer from a case of “split personalities,” Radius General Manager Brian Johnson said at the conference. Year-to-date, there have been 40 commercial sales on the South Coast, he said, putting the area on track for about 60 total deals this year. That’s almost back to pre-recession levels.

The split comes in the make-up of those deals – about 60 percent of the sales are to owner-users, often retail businesses with access to Small Business Administration-backed financing.

As for investment deals, demand often exceeds supply. “We have a large number of buyers … who can’t find enough properties to invest in,” Johnson said.

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