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Pacific Coast Business Times: Tri-county commercial real estate activity likely to grow in 2017

January 06, 2017
Santa Barbara, California – Published 1/6/2017
By Alex Kacik

The prospect of looming interest rate hikes will likely spur more activity in the tri-county commercial real estate market, CRE experts told the Business Times.

“There still is a lot of capital chasing a limited supply in the market,” said Bill Hagelis of Radius Group, which completed its acquisition of the Hagelis Group last year. “There isn’t going to be a quick spike with the proposed gradual rate hikes, but there will be one.”

The growth in commercial real estate didn’t match the same pace of 2015, said Brian Johnson of Radius, but he maintained a positive outlook for 2017. While it will be harder to find good deals, there are still a number of eager investors, he said.

Business expansions trailed off toward the end of the year as many adopted a wait-and-see approach to the consequences of the election, Johnson said.

“If (Trump’s) message is to be believed, there is cautious optimism that we could see taxes fall with more robust investment in infrastructure and in business in general,” he said. “I think you will see continued growth in a more reserved way.”

A flurry of 1031 exchanges continued through 2016 as many took advantage of deferred capital gains taxes and will likely do so through 2017, Johnson said. Investors have been sold on the idea of single-tenant net lease opportunities, he said.

“A break in capital gains taxes could shake a few more folks loose who were not inclined to sell as we saw at the end of 2012 before the last tax cuts sunsetted,” Johnson said. “Before rates go up again we might see a flurry in the spring as people look to lock in rates.”

The industrial sector has grown significantly because of the intersection of Internet commerce and distribution centers, Hagelis said, especially in areas like Santa Maria.

In Santa Barbara, the Average Unit Density-size program that incentivizes development of smaller apartment units has brought some of the most multifamily construction the city has seen, but it won’t make a huge dent in the significant need for housing, Johnson said.

“Hopefully, with the AUD program that will make units a little more affordable, it will positively impact retailers and the State Street corridor,” he said. Multifamily housing vacancy will remain low and rents will likely flatten out with new product coming online, he added.

Santa Barbara’s waterfront is in the midst of a transformation with the development of the Hotel Californian and commercial outlets, the MOXI children’s museum, and new restaurants poised to bring more visitors and boost the slumping retail core. There has been an historically high amount of vacancies along State Street as property owners have refused to budge from inflated lease rates. The retail mix has deteriorated to the point where it has jeopardized Santa Barbara’s reputation as a retail destination, sources said.

“The Funk Zone is taking a good bit of business away,” Johnson said. “The whole idea of what State Street is for retailers needs to be reinvented.”

“There has been more development over the last year throughout the region than we have seen since 2006,” said economist Mark Schniepp of the California Economic Forecast. “There is a lot of catch up still.”

Areas like Oxnard and Santa Maria will continue to see more development because of the relatively lower cost to do business there, sources said.

“Areas in the North County will continue to be more attractive for investment as prices rise in the surrounding areas,” Johnson said. “We expect the increase in activity to continue from the bigger players in Santa Maria, Lompoc and others where those returns become a little more attractive.”

“I’ve experienced Oxnard as the most business-friendly town in Ventura County,” Hagelis said. “It has grown quite a bit in the last 25 years and its goal now is to grow inward and build up downtown to allow residential growth. Santa Maria is also affordable. If you have your own business and need a facility, it has the infrastructure you need. Those two towns are a lot alike.”

The continued progression of The Collection and the surrounding housing development along with the major Wagon Wheel project are poised to bolster Oxnard’s commercial real estate markets. The Collection in particular has been flourishing and is the busiest Hagelis has ever seen, he said.

“Hopefully, they will help businesses be a little more congruent,” Hagelis said. “I love seeing the metamorphosis.”

San Luis Obispo has surpassed its pre-recession peak in construction. In 2006, the city of SLO had $66 million in valuation under construction and the estimate for next year is about $90 million, city officials said.

Mixed-use projects like Chinatown, Garden Street Terraces and Cal Poly San Luis Obispo’s infusion of investment in the downtown core will increase the housing supply and bring infrastructure improvements that aim to create a more accessible downtown.

“SLO is a hot market right now,” Johnson said.

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