Radius Insight: 2013 Year-End Report: Another Big Year for Investor Sales

View Full Report: Radius Insight: 2013 Year-End Report

…More and more investors are competing for a very limited supply of real estate in the Santa Barbara area.

The local commercial real estate market undeniably has experienced steady growth since the “Great Recession” hit six years ago. Consider that in 2012 there were 85 sales transactions, up by 142% over 2009’s low of 35 and equaling 2005’s 15-year high. Last year’s haul came in just shy of that mark at 83 total commercial sales, as it was difficult to match the rush of transactions completed the final weeks of 2012 when many investors sought to escape the impending capital gains tax hikes of 2013.

Sales activity has returned to pre-recession levels and investors are now purchasing prime property for record prices. As to be expected, record high sales have taken place in the most desirable locations including Montecito, State Street and the “Funk Zone”, led by the “Old Firehouse” building in Montecito’s upper village which sold for a record $2,500/SF.

Then there’s Santa Barbara’s “700 Club”, three deals from the past year involving local restaurants that passed under the public’s radar despite high price/SF sale figures, all around the $700 mark.

In November Rusty’s Pizza Parlor purchased a new location at 111 State St., previously home to Bee-Bop Burgers, and this property sold for more than $700/SF with a $5,000,000 price tag. Similarly, in December Blush Restaurant & Lounge purchased its 4,000 SF space at 630 State St. for just under $700/SF or about $2.7 million. In the “Funk Zone”, 137 Anacapa St.—home to The Lark, Figueroa Mountain Brewery and seven other tenants—sold in October to a local investor for more than $700/SF or $11.7 million.

These are the highest prices per square foot we have seen in the area since 2007 with the Firehouse setting an all-time record high for Montecito.

This begs the question, are we seeing the exact same mistakes that got us into trouble in the first place?

We believe the answer is no and here’s why.

It seems the recession actually changed the psyche of investors. While buyers might be paying record numbers for properties, those numbers still have to make sense and the properties have to be well located.

For example, the Firehouse was bought for an enormous $2,500/SF (more than double the previous 2007 high for Montecito), but it was purchased at a 5.4% CAP rate with a 15-year lease and an “A” credit tenant.

Additionally, Rusty’s Pizza paid a healthy figure for their building but Rusty’s, who had been forced out of their Cabrillo building due to the Creek widening project, wisely understands the value of their new real estate given the much-anticipated Entrada Hotel project close by.

In 2014, look for the improving commercial market to significantly impact the number of 1031 exchanges as sellers try to shelter their gains. Perhaps the biggest challenge we may face in the investment sales arena is compressed inventory making it more difficult for many sellers to find suitable exchange properties.

More and more investors are competing for a very limited supply of real estate in the Santa Barbara area, and we expect a number of large sales transactions to close escrow during the first half of the year. Overall, investment sales in 2014 should continue at a similar pace to 2013, and we may see more high profile properties change hands like the Marshalls building on State Street this past November. View Full Report: Radius Insight: 2013 Year-End Report