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.
Several new development projects are beginning to take shape in different parts of Santa Barbara.
» The Alma Del Pueblo Public Market on Chapala and Victoria streets opened April 14 with much fanfare. The market offers a unique shopping and eating experience with an eclectic mix of upscale restaurants and artisanal shops selling wine, cheese, seafood, meat, fresh bread and many other pantry goods.
» In the Funk Zone, the freeway-visible Youth Hostel located at State Street and Highway 101 is now under construction. Several new multifamily projects are also under construction including one complex on the corner of Olive and Canon Perdido streets in which a local developer is building 19 apartment units with ocean views attached to an existing 18,000-square-foot office building. Additionally, the site at 1820 De la Vina St. is being graded in preparation for a 40-unit residential care facility to house Alzheimer’s patients.
» The long-awaited Entrada de Santa Barbara Hotel project is expected to break ground in June, and the Prado Hotel located at 1601 State St. also has undergone a major renovation and is now flagged as a La Quinta Inn.
» The Sevilla condo development project at 401 Chapala St. downtown was completed in May, and all of the commercial units are currently in escrow and a number of the residential units have already sold.
Will the Market Slow Down?
The most logical obstacle to sales continuing at this pace would be a rise in interest rates.
Rates did jump dramatically in May 2013, yet 10-year treasury rates seem to be hovering right around 2.75 percent, and new Fed chairwoman Janet Yellen appears to echo the views of Ben Bernanke, so it does seem unlikely that we will see a sharp jump in rates.
For the moment, it looks like the train may keep rolling unimpeded into 2015.
Commercial Leasing: Santa Barbara Office
There is a palpable shift in the market as vacancy downtown continues to tighten. At the beginning of 2013 the vacancy rate was 6.3 percent. A year later it has fallen to 4.3 percent, causing the average asking rate to climb to $2.85 per square foot gross, its highest level since 2007 before the recession hit. Asking rates remained relatively flat between 2009 and the beginning of 2013 but have been on a steep upward trajectory since then.
Last year was largely about companies like Sonos and RingRevenue gobbling up many of the larger spaces downtown. Now we are seeing a number of tenants in-filling the quality office spaces and leasing various sized spaces, and this has noticeably chipped away at inventory.
This undoubtedly should impact Goleta and Carpinteria as tenants who cannot fulfill their office requirements downtown will open up their parameters in order to stay in the very coveted Santa Barbara market.
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— Vince Coronado is the marketing director for Radius Commercial Real Estate & Investments.