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Radius Insight: 2014 South Coast Commercial Real Estate Year-End Report: We broke the century mark!

February 25, 2015
2014 Year-End ReportClick to Download the Report

And we thought it couldn’t get any better. In 2014, more commercial properties were sold in the South Coast than ever before, totaling 103 transactions and just under half a billion dollars in sales volume ($425,899,476 to be precise). Consider that it was not long ago in 2009 when the market, in the midst of the Great Recession, sunk to a measly 35 sales. Still, perhaps it is even more impressive that at 103 deals, we not only crushed the previous record of 85 sales set in both 2005 and 2012, but we did so on the heals of a very strong 3-year stretch from 2011–2013 (71, 85 and 83 sales respectively).

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2014 South Coast Commercial Sales Graph
Last year’s 103 sales easily smashes previous records set in both 2005 and 2012 for most commercial sales in a year. How will 2015 shake out?

So are we at the peak?
As 2014 proved, records are made to be broken. It was a record breaking year not only for Radius but for the commercial real estate market as a whole, and we really see no signs of a slowing market. Already this year there are some very large properties in escrow, the pool of buyers remains strong and there are several large properties slated to come to market. Not to mention interest rates have fallen, enticing investors to both purchase properties with leverage as well as refinance and pull more money out to look for new investments.

While we may be at the peak number of transactions due to limitations on our inventory, it does not necessarily mean prices will fall or cap rates will increase.

National trends
According to a recent Bloomberg article, in some larger markets such as New York and Los Angeles, residential real estate markets are seeing the impact of the oil crisis and the strengthening US dollar affect home prices as foreign investors simply do not have the same buying power. Locally, it is doubtful that we will see the same impact as the number of foreign buyers is extremely limited. However, we could see a slowing in the number of transactions to be more in line with the 17 year average of 64 sales per year.

What drove sales?
In the 4th quarter there were several large 1031 exchange transactions and several buyers who took their gains from other investments, but the primary factor that contributed to the swath of sales in 2014 was increased investor confidence and a general easing of the financials markets.

Simply put, banks are doing loans at or near historically low interest rates. While it is true that many buyers bought properties without loan contingencies, it was not uncommon that the money used to purchase property came from refinancing other assets, meaning that interest rates still played a large role in influencing sales.

Unemployment Graph

Local Economic News
The unemployment rate in Santa Barbara County has fallen to just 5.7 percent, as reported by the Bureau of Labor and Statistics on Dec. 30, 2014. Industry sectors such as farm, leisure and hospitality, construction, financial activities, professional and business services, and educational and health services combined to add 5,600 jobs in Santa Barbara County in April 2014 alone.

The graph to the right tracks the unemployment rate in Santa Barbara County since 2006, and it has not been this low since October 2008, the beginning of the Great Recession. According to a recent Noozhawk article, Santa Barbara County’s unemployment ranking in April, compared to the other 57 counties in California, positioned the county in ninth place behind Sonoma, Santa Clara and San Luis Obispo counties. In fact, the unemployment rate in south Santa Barbara county in particular is very low, around 3%, versus the state average of 7%.

Big news: Entrada De Santa Barbara has broke ground! The developer received their grading permit, allowing them to level the parcel adjacent to Mountain Air Sports (previous home to Wheel Fun Rental & Hot Spots Coffee). In addition, the creek widening project at Cabrillo Boulevard where Rusty’s previously was located has also broke ground. Several other projects are slated for development in the State Street beach front area including the children’s museum and the extension of the Harbor View Inn. Look for the lower area of State Street to be congested for the next several years as these construction projects take off.

What to look for in 2015
You may recall, in our previous quarterly reports from 2014 we anticipated smooth sailing until interest rates inevitably rose due to the Fed abolishing quantitative easing in Oct. 2014. We suspected this would be the catalyst for slowing the current bull market.

What we did not foresee was that interest rates would actually decrease amidst the current oil crisis and the effect of the strong US dollar which deters foreign investment in the U.S. The realization we came to is something we already knew, that the market is much more dynamic than we give it credit and the future is impossible to predict.

What’s next is very difficult to say. We still believe interest rates will rise at some point, but the reality is our financial system is very complex so when rates will rise and to what degree is unknown. Rising rates will drive rising cap rates which may slow and turn the market, but until then, hold on.

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