The world is watching in disbelief as global credit markets peek over the abyss. The implications of the Treasury’s efforts over the next few months will have profound effects on the economy and, in particular, the equity markets and the real estate sector. Still, local third-quarter data and other studies of the regional and national economy suggest that if the credit crisis is resolved, the economy can continue to grow and prosper.

Clearly this has been the case with the South Coast commercial real estate market as evidenced by declining vacancy rates and strong demand for available office, retail and industrial facilities. The big question is how long it will take to restore confidence in the lending institutions that have retreated to a “wait-and-see” attitude, and as such have restricted the loan flow necessary to sell properties, particularly larger and more expensive assets.

During the next few months, we expect to see a slowdown in the number of sale transactions, while the volume of corporate lease transactions holds steady or may possibly increase. The strength of the regional economy is due to our diversified technology sector, an affluent well-capitalized population, and lack of over building.

Office/Research & Development

Carpinteria

Carpinteria is still a desirable office/R&D market as vacancy rates remain low and average asking prices stay constant. The vacancy rate increased to 3.7 percent during the third quarter, which is up from the 2.2 percent vacancy rate in the second quarter. This is slightly misleading, however, as the base amount of space in this market is only 525,000 square feet. The net amount of square feet added to the market during the third quarter was only 7,875 square feet. Average asking prices dropped minimally to $1.76 gross per square foot from $1.78. Quarter to quarter, these figures do fluctuate, but over the last five years there has been a steady decline in vacancy and a proportionate increase in average asking prices that indicate a very healthy market.

Santa Barbara
The Santa Barbara office/R&D market is the largest of the South Coast submarkets, with a base of 5.1 million square feet. The vacancy rate increased slightly during the third quarter with 199,434 square feet available. This equates to a 3.9 percent rate, a 5 percent increase from the second quarter rate of 3.7 percent. Small office space continues to dominate the majority of the total space available, as there are only two offices available that are over 10,000 square feet. As the number of small office spaces have increased, average asking prices have marginally decreased by 2 percent to $2.62 gross per square foot. Despite softening during the third quarter, the Santa Barbara office/R&D markets continue to remain strong when compared to most urban/suburban markets.

Goleta
Consistent with our previous assessments of the Goleta office/R&D market, the “vacancy rate” is retreating to a level more in tune with what is actually occurring in the local economy. In our last two market updates, the vacancy rate had increased consistently since year-end 2007. This was primarily due to several landlords marketing their buildings as “Available,” while existing tenants decided to renew or relocate. Of the 4.27 million-square-foot base, 348,698 square feet of office space is available, equating to an 8.2 percent vacancy rate. This is down 17 percent from the second quarter when vacancy stood at 9.8 percent.

Significant transactions that contributed to the decline in the vacancy rate include Texas Instruments, which renewed an 11,869-square-foot office lease, Allergan extended the term of an existing 27,000-square-foot office lease, and Yardi Systems expanded into an additional 21,000 square feet of new office space at the soon to be completed Fairview Business Center, 420 S. Fairview Ave. Currently, there are several large tenants — 10,000 square feet or larger — actively searching the market for new locations.

Average asking rates remained steady at $1.81 gross per square foot during the third quarter. Again, this number will most likely rise within the next year as more Class A office space becomes available or is leased.

Industrial

Carpinteria
Carpinteria’s industrial market consists of approximately 1.27 million square feet of space. Large buildings that become available have significant impact on vacancy rates and asking prices, as was seen during the second quarter. One 64,000-square-foot warehouse and another 16,000-square-foot building became available. Over the third quarter, approximately 37,000 square feet of the larger building leased to Elite Flowers, thus dropping the vacancy rate to 5.9 percet from the second quarter rate of 7.5 percent. Average asking prices increased 6 percent during the third quarter to $1.20 gross per square foot.

Santa Barbara
The Santa Barbara industrial market continued to operate with the vacancy rate at a minimal level through the third quarter of 2008. While the vacancy rate increased above 1 percent for the first time since 2005, there are only a handful of available properties for lease. Several of these properties have leases currently being negotiated. Of the 4.2 million-square-foot base, only 50,463 square feet are available, or 1.2 percent. This is up slightly from the second quarter vacancy of .9 percent. Asking prices also increased by 2 percent to an average of $1.59 gross per square foot.

Goleta
The vacancy rate for the Goleta industrial market decreased to 5.5 percent during the third quarter. Consisting of an approximate 4.2 million-square-foot base, 230,209 square feet are available. This drop from the second quarter rate of 6.3 percent can largely be attributed to Jordano’s absorbing roughly 20,000 square feet of additional space in a building where it had been a tenant. This same building on Coromar Drive has had 57,000 square feet of vacant space for more than a year and has contributed to a significant portion of available space on the market. The Goleta industrial market continues to have sublease offerings add to a large percentage — 44 percent for the third quarter — of total space available. The largest of these spaces is an 81,133-square-foot building originally leased to Dupont in Cabrillo Business Park, 6725 Hollister Ave. Average asking prices decreased to $1.18 gross per square foot from $1.35.

Retail

The South Coast retail market is still very strong. Vacancies remain very low at about 1.5 percent. Many of the larger vacant spaces currently available are in the final stages of lease negotiations and should have signed leases by the end of 2008.

One year ago in the prime area of State Street (the 300 to 1300 blocks, between Highway 101 and Victoria Street), there was approximately 118,000 square feet of available retail space on the market. Today that number has been halved to about 55,000 square feet. Notable leases that have been executed are The Apple Store (the former Pier One Imports building) at 924 State St. and Indian Bazaar at 422 State St. a 6,000-square-foot store. There is also a deal pending for approximately 9,000 square feet on the 1100 block of State Street with a major national retailer.

The only buildings still vacant from one year ago are 314 State St., the former location of In-N-Out Paint & Body Shop; 424 State St., the 13,000-square-foot former location of Pep Boys Auto & Tire; and 915 State St. a 4,450-square-foot retail storefront. We attribute this to price, condition and location.

There is good interest from major national tenants looking for suitable locations. These include REI, Forever 21 and H&M. Additionally, several high-profile State Street tenants are searching for larger retail spaces.

Lease rates on State Street, excluding Paseo Nuevo, have remained relatively stable over the first three quarters of 2008 with rents ranging from a low of $1.75 triple-net, or NNN, to $5 NNN per square foot. This broad discrepancy is due to basic fundamentals such as size, location, property condition and term. Rents in Paseo Nuevo — anchored by Macy’s and Nordstrom — are consistently the highest in the market. Small spaces may rent for as much as $10 NNN per square foot.

Commercial Sales

Sales of commercial properties — office, retail or industrial — have slowed significantly over the first three quarters of 2008, compared to the same period in 2007. In addition, the number of closed transactions for the third quarter of this year is only five, which represents a slowdown that has not been experienced for more than a decade. The average price and price per square foot have not shown the same downward trend, however.

Two significant properties closed in September, each at approximately the $13 million mark. During the first three quarters of this year there have been 30 sales totaling $100 million, down by 55 percent compared to the same period in 2007. The average sales price of each transaction declined by only 5 percent to $3.3 million. Interestingly, the average price per square foot increased slightly as a result of the sale of several Class A retail properties that command higher prices per square foot.

The demand for high-quality commercial properties, although down, remain at a level that indicates buyer appetite for Class A Santa Barbara properties. Unfortunately, the overall sales market is currently at a record low pace and we will continue to see the result of price declines for the near future.

While lease rates for prime areas remain strong, we feel that marginal locations may suffer prolonged vacancies. With the current economic difficulties in the financial markets, we do not expect as many start-up retailers to explore the market. These tenants constitute the market for secondary locations. This slowdown may cause landlords to reduce rents for the nonprime retail locations around Santa Barbara County throughout the fourth quarter and into 2009.

Multifamily

This year to date, the average Value Indicators — price per unit; capitalization rate, or “CAP Rate”; and gross rent multiplier, or “GRM” — based off of five of the six sales are price per unit/$229,564; CAP Rate/5.08 percent; and GRM/12.83. This analysis excludes a sale of a five-unit property that sold for $2.2 million or $440,000 per unit as we believe that it is an outlier and not indicative of the true market conditions.

In comparison, in 2007 there were 24 total multifamily sales on the South Coast. All 24 sales were completed before the end of the third quarter, an indicator of the change in the market occurring in 2007. Last year’s average value indicators were price per unit/$237,300; CAP Rate/4.88 percent; and GRM/13.28.

Multifamily Sales

— Mark Mattingly is executive vice president of Pacifica Real Estate Group. Matt Logsdon is an agent with the firm.