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Santa Barbara News-Press: Struggles persist for SB retail

August 23, 2020

Santa Barbara retail market will continue to struggle due to COVID-19

Santa Barbara, California – Published 8/23/2020

The current state of downtown Santa Barbara may continue to worsen in the coming months due to the coronavirus pandemic.

With a current vacancy rate of 14%, founder of Radius Commercial Real Estate Bob Tuler suspects it could balloon up to 18% — or even higher if more businesses decide to leave the corridor.

“There’s a lot of tenants that are barely holding on right now and we’ll see more throwing in the towel over the next six months,” Mr. Tuler said during a recent webinar hosted by the UCSB Economic Forecast Project.

Though more vacancies could be on the horizon, Mr. Tuler was quick to credit the city of Santa Barbara for creating the State Street promenade, shutting down the street to allow business, restaurants, bars and other venues to resume operations.

“I think by closing downtown when it did, it slowed down tremendously on vacancies that are going to be popping up,” he said. “Today we’re at 14% and it wouldn’t surprise me by the end of the year that we’re gonna see that number spike up. It’s going to be below 20%, but it could be as high as 18%.

“That’s a lot of vacancy to have in a 10 block area.”

Over the past 30 years, Santa Barbara County’s overall commercial vacancy rate is under 2%. This has risen above 3% within the past three years, and is currently 3.5%, he said.

The increase in vacancies does signify some issues, though Mr. Tuler said it does not accurately reflect the number of retailers who are struggling.

He specifically noted the 900 block of State Street, which currently has seven vacancies.

“All the current vacancies really are in the 800, 900 and 1000 blocks of State Street. When we start seeing those blocks turn it around, it will be the beginning that State Street will start improving,” Mr. Tuler said.

Still, Mr. Tuler said he expects things to get worse before they improve.

Thursday’s webinar centered around how COVID-19 has impacted the local and national real estate sectors. This includes office, retail, research and development, warehouse, and multi-family units.

Dr. Peter Rupert, executive director of the EFP, opened the discussion and said that collectively, we are all in a “topsy turvy world.”

Every week the economic data changes, he said, referencing an uptick in initial unemployment claims after weeks of seeing them take trend downward. The stock market continues to do exceptionally well, he added.

Gross Domestic Product has dropped by 33%, but economists expect the GDP to rise by 30% after the third quarter.

“We had the largest decline ever in the history of the United States and we’re probably going to see the largest increase we’ve ever seen in the history of the United States,” Dr. Rupert said. “With these kinds of gyrations, it’s very very hard to make any sense of the underlying data.”

Also taking part in the webinar was Francois DeJohn, partner at Hayes Commercial Group, who discussed the office and sales market in Santa Barbara. He began by noting that in 2019, Santa Barbara netted about $600 million in sales marking its best year ever. On average, the city nets roughly $400 to $450 million in sales.

Due to the pandemic, he expects a decrease of 47% in sales year over year, as well as an additional 40% drop in the leasing market.

“Those are very significant clients in activity and frankly haven’t seen anything like that since about 2009,” Mr. DeJohn said, referencing the Great Recession.

He added that he suspects there will be a Goleta tech company that will close for good as early as this week.

“They’re going to be letting go of about 80,000 square feet of space, and that property will be available. To put that in perspective that’s about two percentage points of vacancy for the office market in Goleta. It’s going to be a significant announcement,” Mr. DeJohn said.

At the beginning of the year, the vacancy rate in office space between Carpinteria and Goleta was at about 5.8%. After this announcement, he expects it to rise to 8.2%.

Mr. DeJohn added that he has heard various offices have said they will work from home in the future and not return to an office.

Chris Ludeman, global president of Capital Markets at CBRE, discussed how capital is flowing nationally despite the local struggles.

On average his group, which mediates about $300 billion in capital around the world through capital markets engagements, would launch 110 to 125 equity deals weekly into the market.

When COVID hit, they saw a decline of 70%.

“It was remarkable how quickly that change happened,” Mr. Ludeman said.

Market demands are slowly climbing back, becoming more and more active, he added.

Mr. Ludeman also explained that rent collections were “far better” than expected throughout the country, which he credited to the stimulus money provided by the federal government.

“We track that every week and we manage about 7 billion square feet of real estate around the world, so we have pretty good data on that,” Mr. Ludeman said.

Mr. DeJohn backed this up saying that he “handled leasing on a couple million square feet of office space locally and the collection was about 95%.”

Though the residential numbers were strong, Mr. DeJohn said that in the retail market, he heard collection was closer to 25 to 75%.

“There’s a lot of people really just holding on and struggling, so it’s going to be interesting what happens over the next few months,” Mr. DeJohn said.

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