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Pacific Coast Business Times: Tri-county commercial real estate brokers optimistic

January 05, 2018
Santa Barbara, California – Published 1/5/2018
By Robert Shutt

Commercial real estate in the Tri-Counties will face a long list of challenges in retail, housing and the development of smart industrial space with multiple stories and integrated computing technology but the region’s top commercial brokers are optimistic about 2018 opportunities.

Traditional brick-and-mortar retail has been taking hit after hit from online outlets like Amazon and has consequently seen a general downturn in profits. However, shopping centers that are anchored by service-oriented retailers like grocery stores and restaurants should be OK, experts said.

“Retailers will be even more conservative with their expansion plans in 2018, looking to increase their online capacity with more store closures and fewer physical openings,” said J.C. Casillas, director of research and public relations at NAI Capital. “There is no new construction in the pipeline, so expect slightly higher vacancies and softer rental rates by the end of the year.”

Another common theme in 2018 will be the conversion of retail space into office space. Four companies in Santa Barbara are currently using downtown retail as office space.

“The trend toward an open, collaborative office environment lends itself nicely to retail spaces,” said Gene Deering, senior vice president at Radius Commercial Group. “Prior to the change in retail landscape, retail lease rates far exceeded office rents — causing all retail spaces to remain retail. Look for this trend to continue.”

Downtown Santa Barbara is going to need a major impetus — including a plan to transform the vacant Macy’s — to bring it back to its former glory. In the meantime, commercial brokers are confident that there will continue to be incremental growth in the area.

“A handful of businesses are slated for downtown at this time and it will be interesting to see how or if they help with activity,” said Natalie Wagner, a broker associate at the Shopping Center Group. “Market rents will slowly work their way towards equilibrium and we will see Class B tenants repositioning themselves to Class A properties. This is a great opportunity for some businesses that previously could not get into Class A real estate. This movement creates a shuffling effect amongst vacant spaces. So overall, vacancy will remain relatively constant.”

Even though the economy has improved in the past year and recent graduates are finding jobs, pricing in the Central Coast’s housing market continues to push homeownership just out of reach for a majority of residents.

“Demand for multifamily housing is expected to continue to remain strong. It will be characterized by rising asking rents and low vacancy,” Casillas said. “Due to tight building regulations, housing permits are expected to remain low and supply will remain limited.”

Many Realtors agree that the easing of regulations will be the key to increasing the much needed supply of housing, and the new tax reform laws will add to developers’ desires to build apartment buildings and investors’ searches for income-generating rental properties. Mixed-use projects are predicted to start popping up out of redeveloped buildings to provide desirable housing with a retail component.

“Knowing your tenants has proven to be more important than ever for landlords and property managers,” Deering said. “If a landlord understands the needs of their tenants, then they can possibly accommodate an expansion or contraction without losing a tenant. Communication also allows both tenant and landlord to work together and plan ahead.”

In the future, leaders in business are hoping to find smart storage and industrial space. They want their spaces to be state-of-the-art to boost their productivity as well as their supply-chain strategies.

“Strong demand by businesses, low inventory and a limited construction pipeline on top of a strong economy should push rents soaring to new heights for industrial space in 2018,” Casillas said.

In the investment market, debt capital should stay inexpensive in the short-term and bountiful in the New Year but the major key in 2018 will be more active sellers.

“Higher prices, tax reform changes and the prospect of higher interest rates affecting pricing may influence more owners to sell. The lack of product for sale has kept many waiting on the sidelines. There is no shortage of buyers, from private, institutional and offshore investors looking for opportunity,” Casillas said. “Additionally, tax reform changes will benefit investors in commercial real estate.”

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