The fourth quarter of 2009 experienced a continuation of the increased activity in the Santa Barbara office leasing market that emerged late in the third quarter of 2009.

Throughout 2009, there were a total of 11 office leases greater than 5,000 square feet. Of those, seven were completed during the fourth quarter. That means that only four leases of more than 5,000 square feet were completed in the first three quarters of 2009. This is astounding for a market consisting of more than 5 million square feet.

During the fourth quarter of 2009, it was not uncommon for tenants in the marketplace to make overly aggressive offers on multiple properties. In many cases, once landlords rejected these offers, tenants became more practical with their expectations regarding lease rates and incentives.

Tenants with realistic expectations continue to be in a position to secure long-term leases at lower lease rates for extended periods of time.

The slowdown in the marketplace during the past 18 months helped property owners gain a better appreciation for tenants. Property owners in Santa Barbara were not used to providing incentives such as free rent or tenant improvements allowances. Lease incentives locally still pale in comparison to other markets, where vacancy rates often exceed 20 percent.

It’s important to understand that the Santa Barbara marketplace is unique. The ebbs and flows of the national and regional markets have some effect on Santa Barbara, but having a local understanding of this market remains paramount for both tenants and landlords. 

Moving forward in 2010, look for office activity to be similar to the fourth quarter of 2009. This most likely will produce a number of completed transactions, which will be higher than last year but less than the years before the slowdown. Tenants and landlords are starting to feel that the market is at or near the bottom.

With the Santa Barbara office vacancy rate dropping from 7.2 percent to 5.3 percent, look for the vacancy rates to continue to decrease this year. If the office vacancy drops below 4 percent, it is likely asking rates will start trending upward once again.