RADIUS INSIGHTS | SANTA BARBARA MARKET REPORTS & RESOURCES

As we predicted in our reporting during the year, the total number of commercial sales for 2018 came in well under the all-time highs we’ve seen during the past five years.

In the 4th Quarter there were 24 sales including one agricultural (read: cannabis) property. While this was two more transactions than Q4 2017, total deals for all of 2018 amounted to only 81 versus 97 for 2017, a 16.5% decrease. Part of this decline can be attributed to the catastrophic December and January events on the South Coast which resulted in lower sales during the first and second quarters. It should also be noted that we still surpassed the prior-15-year average of 75 sales per year. And we should not rush to speculate that this softening in sales activity portends anything ominous. As noted in our Q3 report, we may in actuality be witnessing a balancing of the market.

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Multifamily Sales Summary

No doubt 2018 was a relatively slow year for multifamily investment sales in the South County. The effects of the twin natural disasters from last December and January certainly impacted all commercial real estate sectors at the beginning of the year. That coupled with the continued trend of low inventory, we tallied just 21 total sales of multifamily properties 5+ units in size during 2018, four fewer than 2017 and well below 2016’s record 42 sales.

3rd Quarter sees second straight year of declining sales activity since 2016; rise in owner-user versus investor purchases

With 2018’s 3rd Quarter coming to a close, we can confirm that market activity year-to-date is continuing to decline since the peak in 2016.

In comparison to last year’s 3rd Quarter total of 25 commercial sales amounting to $85,387,500 in sales volume, this year’s 3rd Quarter came in at 22 commercial sales with total sales volume of $64,328,520, not including the outlier sale of the Hyatt Centric Hotel located at 1111 E. Cabrillo Blvd., which traded in July for $87,500,000. Large hospitality sales typically tip the scales, so subtracting that sale reduces 3rd Quarter volume to roughly $21 million below Q3 2017.

As the second quarter of 2018 came to a close, market activity, as expected, did not seem to change much from the first quarter. Overall, the second quarter’s 15 sales brought the total number of sales for the first half of the year to 29. That is a sharp decline compared to the 49 commercial sales we recorded in the first half of 2017.

Total Q2 sales volume was approximately $50.2 Million compared to $69.5 Million this time last year, with the largest transaction of the quarter at 3045 De La Vina St. The 18,000 SF office building that shares a parking lot with Trader Joe’s at the upper end of the emerging De La Vina corridor traded for $9.5 Million. In fact a majority of Q2 sales came from Santa Barbara office properties which included 6 sales for a total of $21.4 Million.

So why has the transaction total decreased?

Perhaps not surprisingly, sales during the first quarter of 2018 got off to a markedly slower start versus Q1 2017. Altogether the first quarter compiled 14 sales of commercial property totaling approximately $53 Million in volume, not too far off the prior 15-year average of 18.7 sales per quarter but significantly fewer than Q1 2017’s 30 sales and Q1 2016’s 24 sales. In fact, Q1 2018 has been the weakest first quarter since 2013. So what is causing the slow start to the year?

The high annual transaction volume that started in 2014 continues. Last year was another strong year with 97 total sales, just six short of 2014’s record 103. The majority of commercial properties sold in 2017 were office buildings (37) followed by retail (24). Though not for lack of demand, industrial and land sales totaled just 17, while there were also two hotel sales. The 4th Quarter’s 22 sales were down from Q1’s high of 31, yet still above the 17 sales-per-quarter average and in line with 2nd Quarter (19) and 3rd Quarter (25)…

From 2014 to 2016 we experienced the three strongest years of commercial sales on the South Coast since Radius began recording market activity in 1998. In fact 2014’s record 103 transactions were nearly matched by last year’s 101. And despite the fact that dollar volume dipped last year to $366 Million versus $437 Million and $439 Million in 2014 and 2015 respectively, 2016 was still a strong year by any standard.

Enter 2017 and, while we are on track for another strong year, we do appear to be in a bit of a transition period (call it transformation?) with some divergent storylines emerging, particularly involving industrial and retail properties in the downtown area…

The second quarter of 2017 came to a close with 18 sales, considerably short of the first quarter’s strong haul of 31 transactions which was the strongest first quarter we have seen in the last 18 years. This brings the first half of the year to 49 total deals. That said, the first half of the year was only 4 transactions shy of tying 2014 for the most prolific first half we have ever recorded…

South Coast commercial sales for the first three months of 2017 were the strongest we have seen in the last 18 years.

During the first quarter there were 30 commercial sales, twice as many as the 18-year average of 15 for Q1 sales. We even surpassed the 24 sales closed in Q1 2016 which was another strong opening quarter.

Total sales volume for the first quarter was $134 million, up slightly from 2016’s $129 million and completely overshadowing the $49 million closed in Q1 2015…

Based on Radius records going back to 1998, 2016 was another impressive year for commercial sales on the South Coast. The year came to a strong close with 101 sales transactions, just two shy of 2014’s record 103 sales. In spite of a slow recovery from the Great Recession, commercial sales on the South Coast for the past half decade have not fallen below 83 deals for each of the last five years, reinforcing the region’s status as a relatively safe haven for real estate investments.

That said, despite 11 more transactions in 2016 than in 2015, total sales volume and average sale size fell off pace. For example, 2016 saw total transaction volume of $366 Million, compared to $437 Million in 2015 and $439 Million in 2014. While this certainly does not suggest that property values are dropping, individual deal sizes are. A possible trend to monitor, but probably more of an anomaly due to the fact that inventory size and quality vary from year to year.

Why is it when we consider the state of commercial real estate investments in our market, everything starts looking like a trek through the Santa Ynez Mountains?

Hills and valleys. Peaks and plateaus. Given the commercial activity of recent years, to some it might seem the valleys are shallower and the peaks are milder. Casual climbers have certainly enjoyed a more easy-going trail over the past few years, while aggressive hikers have recently been left needing a bit more.

The second quarter of 2016 came to a close with 23 sales, one short of the first quarter’s strong haul of 24 transactions, and bringing the first half of the year to 47 deals total. In fact, the first half of the year was only 5 transactions shy of tying the first half of 2014, the most prolific first half of a year Radius has recorded.

Total sales volume for the quarter was approximately $72 Million with the largest sale being an approximately 12.5 acre land property in Goleta that sold in April for $13.5 Million. At the midyear point, overall sales volume was approximately $201 Million in comparison to $157 Million during the same period last year. This represents a 28% increase in total sales volume year over year…

Statistically, first quarters tend to produce the fewest sales of the year. However 2016 got off to a solid start with 24 commercial sales during the first three months. To put it into perspective, first quarters over the past 18 years have averaged just 15 sales.

Furthermore, the 24 commercial deals closed during Q1 2016 represents the most prolific first quarter since 2011…

The resurgence of commercial sales activity in the South Coast that began in 2012 rolled through 2015 with an impressive 89 total transactions for the year. In fact, the past four years have been so strong that the annual average which Radius began tracking in 1998 has increased from 65 sales per year to 70. While the last four years have been phenomenal, 2015’s 89 sales (second most recorded) could not top the record high of 103 sales achieved in 2014.

As many have probably noticed, sleepy Santa Barbara has an unusual amount of development projects either underway or breaking ground soon. We have seen a backlog of moth-balled projects — some of which have been 20+ years in the making — which are now moving forward as a result of an improving economy, available financing and political will.

While 2015 got off to a slow start with only 15 sales completed during the first quarter, the market, as expected, began to pick up steam with 23 sales in Q2, which is well above the 16 sales-per-quarter average. Despite the fact that both quarters paced behind a record-setting 2014, the market remains frothy for well priced properties in Santa Barbara.

On the surface it was a rather unremarkable first quarter on both the sales and leasing side. Activity has eased after 2014’s gangbuster 103 commercial sales with considerably fewer deals during Q1 2015 than the same quarter last year, though we were not far off the 17-year quarterly average with 15 total. In fact, the +$20 Million sale of the REI building in downtown Santa Barbara is just the first of several larger sales we anticipate this year, which may shift the narrative from the number of deals to sales volume.

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).

“…Well located real estate … has returned to 2007 prices and in some instances has surpassed those levels.”

This time last year we were questioning whether we had truly come out of our economic slump and now we can answer with an affirmative—at least it certainly seems so here on the South Coast.

It seems the market cannot get any hotter, at least with regard to commercial sales.

The second quarter of 2014 came to a close with 27 sales, edging the very strong performance of 25 transactions during the first quarter, and bringing the first half of the year to 52 deals total.

This is the most prolific first half of a year on record, and we are quite possibly on pace to end the year with total sales transactions in the high 90’s, which would also be the greatest number of annual sales we have seen since Radius began keeping records about 17 years ago.

…one major factor driving this sales activity is the proliferation of 1031 exchange transactions. As we predicted, the combination of limited supply and hungry buyers started the year with a bang.

The first quarter of 2014 was undoubtedly the strongest first quarter we have seen in three years. The 23 commercial sales recorded easily trumps Q1 2012’s 11 deals and Q1 2013’s 14 transactions.

If this pace continues—with inventory remaining low and investors poised to pounce—2014 could produce the greatest number of commercial sales in the South Coast in more than 17 years.

As we alluded in our 2013 year-end report, one major factor driving this sales activity is the proliferation of 1031 exchange transactions. We expect this practice to continue.

New buyers are absorbing the limited supply, driving prices ever higher and breaking off-market properties loose, forcing sellers to then exchange into new properties and continuing the cycle.

…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.

Last year at this time we were asking ourselves, “Are we there yet?” Well, I suppose that depends on your definition of “there”, but it seems that in spite of the chaos and confusion in our government, the general public is ready to move on with their lives, and that includes the economy. While the Fed’s support (also known as Quantitative Easing) continues, interest rates are still historically low, banks have either healed or been consumed by their brethren, and business is moving or wants to move forward.

This includes the real estate industry. Housing has certainly come roaring back with the number of sales substantially over the previous year’s numbers. Overall, prices have stabilized and for houses that are priced right and are affordable to the majority of buyers, there are multiple offers. Whether this precedes another bubble is too soon to predict, but suffice it to say, it is cleaning up the inventory and creating a more stable environment for lenders and consumers.

Despite a lack of “game-changer” headlines during the first two quarters, there are a handful of developing stories that merit attention. Perhaps none more noteworthy than the sustained surge in popularity of the multi-family (apartments) market.

Given a host of factors, including historically low vacancy rates, there are an increasing number of investors in the South Coast willing to put cash on the table to scoop up apartment properties as soon as they hit the market. While interest is showing no sign of letting up, declining inventory may cool things off (see pages 9–10 for more detail).

What may seem to have been a somewhat pedestrian performance for first quarter commercial sales at just 14 total (down substantially from Q4 2012’s stellar 35 transactions) was in reality not far off the 15-year average of 16 per quarter.

Q1 2013 sales were higher than the 12 recorded in the first quarter of 2012. And thanks to one very large commercial transaction, the sale of Bacara Resort for between $150-$180 million, sales dollar volume was in line with previous quarters. Altogether a decent start to the year.

Local Commercial Real Estate makes great strides putting uncertainty of recent years in rearview mirror.

It would be an understatement to say 2012 was chock full of compelling stories. And while in any year you can point to peaks and valleys in any economy or market, the peaks last year drove much of the storyline. Here are five of 2012’s top stories…

A look at the trajectory of the Commercial Real Estate industry in the South Central Coast…

Needless to say, all business activity in the United States, and the world for that matter, has been adversely affected by the dire economic conditions we have been experiencing over the last five years. Banks, the automotive industry, energy, real estate, even governments, all have taken their blows.

Some of these industries, most notably the banks and auto industry, have been propped up by government subsidies, be they low interest rates or flat out “loans”, in the hopes that they would make comebacks and that the loans would be repaid.

Despite historically low interest rates, continued European financial uncertainty has sidelined many investors for the first two quarters of 2012. Locally, there are two contrasting financial indicators that are worth keeping a close eye on.

While the latest figures show an uptick in Santa Barbara County’s unemployment rate, increasing from 7.4 percent in May to 7.9 percent in June, “We continue to see the trend of improvement over the same period from the previous year, which is a silver lining,” said Raymond McDonald, executive director of the Santa Barbara County Workforce Investment Board, in a Noozhawk report.

Generally speaking, as the job market goes, so does the economy. It’s worth noting that both the job and the commercial real estate markets in Santa Barbara County are showing encouraging movement in the right direction.

As reported recently in the Santa Ynez Valley News, the latest state figures show unemployment in Santa Barbara County improved from 9.7 percent in February 2011 to 8.9 percent this February.

As 2012 moves forward, it’s worth taking another look back at a sluggish 2011 to gauge how the commercial market responds.

All sectors are seeing improvements or signs of improvement, so it appears a slow recovery is underway…

Continuing uncertainty in the national and local economy contributed to a lackluster third quarter in the South Coast Leasing Market.

Vacancy rates were mixed along the South Coast with small drops in the Industrial sectors of Santa Barbara and Carpinteria and the Office sector of Santa Barbara while there were slight increases in the Carpinteria Office and Goleta Industrial sectors…

The Leasing Market returned mixed results during the second quarter even as leasing activity remained strong.

Vacancy rates increased slightly in all sectors (office, industrial and retail) in Santa Barbara while the Carpinteria and Goleta office sectors experienced decreases.

The South Coast lease market saw positive downward movement in vacancy rates across the board, with the exception of the Carpinteria industrial market.

This is the first time in four years that all office indices saw a reduction in vacancy.

That’s a common question that a lot of people are hearing and asking these days. Is the economy improving yet? Is the commercial real estate market improving yet?

Well, one thing is for sure, 2010 is now over and we are looking forward to 2011…

The third quarter of 2010 saw 11 completed commercial sales transactions. The largest sale was the Salvation Army’s 57,000 square foot campus in Carpinteria.

This property sold for more than the asking price of $6,000,000 to the neighboring tenant lynda.com…

The second quarter of 2010 saw a slight decline in the total number of commercial sales, however, that is still a continued improvement over the same period in 2009…

We saw nine commercial sales (excluding apartments) for the second quarter versus 12 for the first quarter…

The commercial markets are heating up compared to 2009 but it will take a fair number of consecutive strong quarters for vacancy rates to decrease.

At the end of the first quarter the vacancy rate for the overall office market on the South Coast is currently at 9.3% which is the highest overall rate we have seen since we began tracking the vacancy percentages in 1992.

2009 has ended and while there was little celebrating to do, the overall impact of the year was not as calamitous as many people predicted.

About halfway through the year we saw a noticeable increase in activity on both the sales and leasing side…

In 2009 to date, the South Coast has had only 22 commercial sales transactions compared to an average of 68 transactions per year over the last 11 years.

In the last few months, however, we have seen an increase in the amount of sales activity evidenced by 12 of the 22 sales happening in the third quarter and more offers and more properties going into escrow…

The commercial (office, R&D and retail) sales market continued to limp along through the second quarter of 2009.

The first quarter finished with only 6 commercial sales, and the second quarter witnessed only 4 bringing the grand total to 10 for 2009…

The most telling statistic from the first quarter of 2009 was the lack of completed sale transactions.

The dramatic decline of both the stock market and credit markets beginning in September of 2008 were contributing factors as very few properties went into escrow in the fourth quarter of 2009 and subsequently only six properties closed escrow in the first quarter of 2009…

The commercial market in South Santa Barbara County (Goleta, Santa Barbara, Carpinteria), is not immune to the recent economic downturn which has affected the majority of our country.

In 2008, we saw commercial vacancies rise across the board and lease rates start to decline…

For the year, vacancy rates have increased across all quarters of the commercial real estate landscape.

The initial slowdown was first noted at the end of the first quarter before the true nature of the credit crisis was discovered…

Along the South Coast, commercial markets saw a decrease in activity over the second quarter of 2008.

The average vacancy rate is still low with Santa Barbara office at 3.8% and Santa Barbara retail at 1.2%, however office vacancy in Goleta increased slightly to 9.0%…

Along the South Coast, commercial markets continued to see good activity through the first quarter of 2008. The exception is that the office market in Goleta saw vacancies more than double from the end of 2007, from 3.5% to 8.6%, as several new locations have come on to the market during the first quarter of 2008…