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Santa Barbara News-Press: Business Outlook Q&A: Inventory a challenge for real estate markets in 2015

January 19, 2015

Q&A with Radius Principal Bob Tuler

Santa Barbara, California – Published 1/19/2015
Santa Barbara News-Press
By Steve Sinovic, News-Press Staff Writer

Buying a first home or selling one might be on many people’s priority lists in the new year. But with new listings declining in South County, it looks like the number of sales will continue to decline in 2015.

That’s according to Gary Woods, a Realtor with Sotheby’s International Realty and the statistician for the Santa Barbara Association of Realtors.

Limited inventory is the biggest hassle facing both buyers and sellers wanting to stay and trade up on the pricey American Riviera, Mr. Woods said.

Eager real estate professionals are scrambling for listings in a market where 10 percent of the agents handle 90 percent of the transactions for both local and out-of-market clients, he said.

Forecasts for the commercial real estate market in the South Coast show a similar trend = a large number of buyers chasing limited inventory to expand or open office, retail and industrial spaces.

Also, the investment market will remain extremely hot, said Bob Tuler, a principal/broker with Radius Commercial Real Estate & Investments.

The supply-and-demand situation is a result of many troubled properties clearing out of the system following the Great Recession and returning to something resembling the markets of years past, both said.

Today, Mr. Woods and Mr. Tuler provide an overview of the forces and issues that will drive their respective areas of real estate in the coming year.

Commercial Real Estate: Bob Tuler

Q: What’s the biggest trend/indicator you’ll be watching next year?

Tuler: It was a record-breaking year in commercial sales in 2014 with more than 101 properties sold, surpassing the previous mark of 85 set in both 2005 and 2012.

Additionally we saw numerous multiple-offer situations. Most recently we sold a retail building in the 700 block of State Street with eight qualified offers and in West Beach a fourplex had 27 offers. In 2015, we will continue to see an unprecedented number of buyers chasing limited inventory and the investment market will remain extremely hot.

Bank loans will be another area which I will be monitoring closely in the coming year. One of the biggest drivers of the economy is the ability of buyers to obtain commercial real estate loans at low interest rates.

Owner-users will continue to purchase vacant office and industrial properties made possible by low-interest SBA financing available with only 10 percent down. In fact, mortgage payments for many owner-user buyers will actually be the same or lower than they are currently paying in rent.

And finally, we will continue to keep an eye on the increased interest in our market from out-of-town buyers. In the past 18 months, we have seen a considerable amount of interest from both investors and developers from out of the area.

In the past, these investors have been reluctant to accept our lower returns and developers are reluctant to take on the incredibly slow development process. Now many of these investors are competing with local buyers for higher quality locations and properties

Q: What types of commercial spaces are moving? (office, manufacturing, warehouse, etc.) What types are having a harder time attracting interest? And why?

Tuler: Industrial/warehouse property is in very high demand with considerably low availability of space between 8,000 and 20,000 square feet. Over the past 35 years, I have never seen industrial vacancy as tight as it is now; the vacancy rate in the South Coast hit all-time lows in 2014.

Any warehouse and industrial building with roll-up doors has likely seen a 20 to 30 percent increase in lease rates since 2012.

We have also seen owners demolish office space to increase the amount of industrial/warehouse space available in a property.

For example, the owner of 6860 Cortona, a 12,000-square-foot office/industrial space with 70 percent office and 30 percent industrial, had a hard time finding a tenant. The owners demolished half the office space to create 30 percent office and 70 percent industrial and within two weeks they had three offers.

Also worth noting, in Carpinteria there is a large deal in the works which should jump start the area’s office market, which has been the slowest market segment we track over the last few years.

Q: Can you discuss one or two office, industrial or retail deals you and your team recently worked on? Any big fish on the hook?

Tuler: We are very close to finalizing two high identity retail leases, including the former Elephant Bar in Goleta and the former post office building on Milpas Street. Both deals should bring a great deal of vibrancy to their respective areas.

But the 2014 deal which may ultimately have the most impact on the local real estate market is the 75,000-square-foot lot I sold in the heart of the Funk Zone. That area has already seen tremendous change and growth over the past few years with the Entrada and such, and no slowing in sight.

I am hopeful the developer of this very large parcel will also be able to build an exciting mixed-use project on the site in the very near future and that would open more opportunities for additional home-grown businesses and retailers.

Not far from the Funk Zone on lower State Street near the freeway we continue to see significant interest in the REI building, which is listed at $21,950,000.

Q: When you are working with out-of-town clients, you often have to help them learn about the South Coast. What’s your message for why they should do business here?

Tuler: Long-time, savvy investors understand that the stability and value appreciation in the South Coast most often outweighs a slight reduction in annual return. It’s also important to recognize that the vacancy rate for office buildings in Santa Barbara is much lower than in most areas.

Most markets in the L.A. area, for example, have a 15 percent-plus vacancy rate versus the city of Santa Barbara, which is around 4.7 percent. Frequently, vacant buildings here have been bought by owner-users like Karl Storz, CMC Rescue, Enerpro, Mosley, Medbridge and Dako.

Right now, I am listing four separate buildings in Goleta which can all be delivered vacant allowing for owner-users to purchase them. From a community standpoint, anytime a tenant buys their own building they are committing to the area, which is great for the local economy and for the vibrancy of the entire region.

Q: Is multifamily likely to keep its status as a preferred asset class in 2015? I understand pickings are extremely slim for this competitive segment in South Santa Barbara County. Is the interest shifting north?

Tuler: Multifamily is definitely in high demand and that will not change anytime soon. There are not a lot of apartment buildings available for purchase.

With limited inventory on the South Coast, more investors are open to looking to the north, but I would say interest has remained very high locally and has grown throughout the entire Central Coast.

The increased demand in multifamily has even paved the way for investors to begin building new apartment buildings, which in turn will provide much needed quality rental housing options in this area, especially as we continue to experience one of the lowest vacancy rates for rental properties in the nation.

Also, based on the incredibly high achievable values for apartments, many sellers are seeing that their properties may be worth 20 to 30 percent more than they anticipated.

Q: Are you seeing much interest from large companies looking to move here, or is the market increasingly dominated by smaller and mid-sized companies?

Tuler: The leasing market is dominated by companies that already have a presence here, especially homegrown companies. You look at some of the fastest-growing companies in our area and they have included local startups like Deckers, Sonos, Transphorm, Find the Best, Pro-Core and Nusil.

Typically, we only see large companies come to town when they acquire a local company, as was the case with the acquisitions of FLIR, Johnson & Johnson, Allergan and DuPont.

Our market will never be dominated by large companies as the cost to do business on the South Coast far exceeds other areas.

Q: How do millennials, who are likely to do business at home, in shared spaces or at Starbucks, factor into the long-term commercial leasing picture?

Tuler: I did find it interesting in 2013 when Yahoo’s CEO Marissa Mayer had all Yahoo employees come back to working in the office. There is definitely something to be said for walking into a colleague’s office and collaborating face-to-face on an issue.

I think this in part is why we are seeing so many companies look to modern, open layouts with more creative uses of space, to attract and keep young talent by providing a work environment that feels less and less like “work” as we know it.

CEOs are seeing that these kinds of work spaces improve the productivity of millennials and non-millennials alike, and that’s going to continue to put pressure on landlords and property owners to improve their buildings to attract long-term, quality tenants.

Q: Is there enough demand to support new hotel construction/developments like the Miramar and La Entrada? How deep is the market for these boutique hotel projects, which also have retail components?

Tuler: First, I am very proud that Radius has sold more hotels locally than any other brokerage, including the high profile La Entrada deal with new construction underway, and the former El Prado Hotel at State and Arrellaga streets, which has been beautifully renovated by the new owner and is now a La Quinta Inn & Suites.

There is absolutely enough demand in our market for projects like the new Miramar and La Entrada. Not only are both in prime locations, but the city of Santa Barbara’s transient occupancy taxes are at all-time highs.

Santa Barbara has always been a top destination for travelers and shopping and dining, and with the economy in good shape, it’s not surprising the hospitality industry in the area is booming.

In 2015, Radius will also be listing a large hotel development property near the ocean in Santa Barbara, so stay tuned for more details on that announcement.

Q: Finally, how do you assess the possibility that a Target store will ever open in Goleta or Santa Barbara?

Tuler: I think the chance a Target opens in either Goleta or Santa Barbara in the near future is very slim. That ship may have sailed for now. I know that’s not what people or the local cities want to hear, but there’s no reason to believe anything will change anytime soon.

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