There is a significant shift in storyline in the world of commercial sales in the South Coast. This appears to be the year of the investor.
Excerpt from Radius Insight: Q3 2013 Report, By Brad Frohling, Radius Principal
In recent years, owner/occupants have represented the majority of transactions. But through the 3rd Quarter of 2013, 38 of the 58 sales to date (65%) were investor sales.
The surge is not surprising. Bank lending is aggressive and quality assets in limited-inventory markets like Santa Barbara are in high demand.
Notable transactions include the sale of three hotels including the Bacara, The Holiday Inn in Goleta and the Hyatt on Santa Barbara’s West Beach.
Also worth noting is a considerable uptick in development/repositioning deals, which have been almost non existent over the past few years. Already in 2013 we have seen about half a dozen development deals including entitled housing projects, a new spec retail building at 528 Anacapa St. (French Press), and a new gas station. While that may not sound particularly significant, investors and lenders clearly are back in a space that was dead a couple of years ago.
Currently there is tremendous scarcity of product for quality, stabilized properties, helping explain why more than a third of the transactions in 2013 were off market deals. This shortage of inventory has depressed commercial capitalization rates in the region, dropping from an average CAP rate of 6.18% in 2012 to 5.63% in 2013.
A recent survey by the publication National Real Estate Investor found that commercial CAP rates nationally average 6.91% which is the lowest level since 1997. Santa Barbara investors not only must compete amongst a very deep pool of buyers but ultimately accept lower overall yields and returns to get in this market.
Santa Barbara is a built out town in Coastal California drawing in buyers from all corners of the globe including pension funds, LA developers, foreigners and institutions. This is a common theme nationally as core, Main Street type assets are seeing sub 5% CAP rates and in some cases sub 4% CAP transactions throughout the country.
There are certain properties that have been on the market for extended periods of time such as 5464 Carpinteria Ave., a 52,000 SF office building which sits 50% vacant. This is a prime example of a quality asset that is not stabilized due to high office vacancy plus a very quiet leasing market.
Still, while no longer dominating in the overall number of transactions, the owner/user market remains active with the SBA loan program continuing to offer compelling 10% down and interest rates as low as the high 4’s. Just recently Citrix purchased three buildings totaling 160,000 SF located at 7414–7418 Hollister Ave. in Goleta, for $19,725,000 or $123/SF. That is the clear owner/occupant sale of the year.
Other notable owner/occupant transactions include the sale of 406 E. Haley St. (formerly Tileco) to Becker Construction who purchased the 19,000 SF building for $3,650,000 to renovate and partially occupy the space; and the September sale of an approximately 4,100 SF retail space at 1017 State St. for $3,160,000.
While many businesses remain interested in purchasing their own buildings, a significant amount of demand has been satisfied in the last several years.
It should also be noted that the number of sales transactions through the 3rd Quarter is up, at 58 total deals compared to 50 during the first three quarters of 2012. Similarly, total volume this year is up, at about $246 million compared to $208 million during the same time period in 2012. And this does not even factor in the Bacara sale as the pricing was not disclosed.
However, it is important to point out that 2012 saw a tremendous amount of sales toward the end of the year—prompted by the imminent capital gains tax rate increase in January, 2013—ending the year with 85 transactions and $372 million in total volume. While we expect another 15–20 transactions during the 4th Quarter of 2013, we do not expect to see that sort of cumulative dollar volume.
Going forward into the remainder of the year and into 2014 the interest rate conversation is central. Currently a buyer purchasing a 5.5% CAP rate, for example, can still secure positive leverage with loan rates below 5.5%. If interest rates continue to climb, we suspect a leveling out of CAP rates and an eventual slight increase.
The continued demand for AAA, stabilized assets will continue as there remains significant cash on the sidelines looking for some level of return in hard assets. With the treasuries and economic conditions still in question, real estate remains a hard asset that does hedge against the risk of inflation for investors. The Santa Barbara market in general has evolved into much more of a market to preserve wealth versus wealth creation.
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