Activity sluggish before coronavirus, ‘hit a wall’ after
South Coast commercial real estate sales sharply fell during the first quarter of 2020 compared to the same time last year, but the coronavirus may not be entirely to blame.
On Friday, Santa Barbara-based Hayes Commercial Group released a five-page South Coast commercial real estate market report on the first quarter of 2020.
According to the report, the uncertain public health trajectory of the coronavirus can’t be accurately predicted. Therefore, forecasting its economic impacts is “a matter of speculation.”
“Most economists warn that a V-shaped recovery is unlikely, and we should expect a more gradual L-shaped thawing of the economy. We would echo that caution in regard to commercial real estate.”
The report said 13 commercial sales transactions were finalized in the South Coast during the first quarter; down 38% from the same time period in 2019 and down 37% from the five-year average.
Those sales, which exclude hotels, were worth $38 million, the lowest single-quarter total since 2011. That total is down 70% from 2019 and 63% from the five-year average.
The largest sale of the quarter, a 24,772 square foot office in the 1150 block of Eugenia Place in Carpinteria, accounted for $9 million of the total.
Other noteworthy sales include a $5.7 million sale in the 500 block of State Street, a $5.6 million sale in the 100 block of East Micheltorena Street and a $4.2 million off-market sale in the 2500 block of Lillie Avenue in Summerland.
There are currently 74 commercial properties for sale in the South Coast, up 17% from 2019 and up 40% from the five-year average.
“There was not a “coronavirus effect” on sales during Q1 in which each month produced less volume than the previous. In fact, sales activity was sluggish through all three months,” the report read.
The authors of the report speculate that the drop in activity may indicate a lull following a remarkably high-volume year in 2019.
“The remarkable surge of owner-user sales during 2018 and 2019 did not carry into Q1 (of 2020), as owner-users returned to a more historically consistent 38% of buyers,” the report read.
South Coast office vacancy hit a 12-year low this quarter. The authors say this trend was driven by the continued demand for office space in Goleta, which hit a historic low of 4.6% office vacancy.
Just three years ago, office vacancy in Goleta was 11.8%. Now the largest available space is a 42,000 square foot building at 125 Cremona Drive that was recently vacated by Medtronic.
At the other end of the spectrum, Santa Barbara’s 6% office vacancy is still “very high by historical standards.” The authors noted the trend may be cause for concern as the South Coast braces for an economic downturn because of the coronavirus.
“Leasing momentum waned through the quarter as the coronavirus crisis emerged. There were 17 transactions in January, 10 in February, and 7 in March,” the report read.
Twenty percent of Santa Barbara’s current inventory became available in the first quarter. There are currently 52 properties for lease downtown. The authors say this is the largest inventory on record.
The Carpinteria and Summerland office markets are “calm” according to the report. There were just two transactions in the first quarter, and no known tenants are looking for space in the area.
In January, the value of south retail leasing transactions was consistent with the average rate over the last five years. However, “deal flow” declined dramatically when news broke of the coronavirus shutdowns. Only three transactions were signed in the last seven weeks of the quarter.
“It will take time for market vacancy rates to reflect the effects of the pandemic. Projections that up to 30% of restaurant and retail businesses will not reopen portend a glut of space coming available over the next few quarters. Fortunately, South Coast vacancy prior to the crisis was approximately one-third the national average,” the report read.
Retail leasing vacancies are at 3.8% in Santa Barbara 2.3% in Goleta and 6.5% in Carpinteria.
Available space is up 2% in Santa Barbara and 3% in Goleta compared to 2019. Carpinteria is down 12%
The authors say Isla Vista may be the hardest hit retail district because of the large number of students who have left town.
“Unlike other areas, summer is normally a slower season for businesses in Isla Vista, which will be even more true this year,” the report read.
The report notes the city of Santa Barbara hired an economic development director, who began work April 1, to help lead the response to the impending economic crisis.
“State Street was already struggling with a sustained period of high vacancy,” the report read, noting quarterly storefront vacancy from the 600 to 100 blocks of state street averaged 6.4% from 2011 to 2015. Since then the average rate has been 14.1%.
According to the report, landlords have been forced to lower rental rates to secure tenants. The average rent rate in the 600 to 1000 blocks of State Street is 23% lower than the average from 2011 to 2015 when adjusted for inflation.
Industrial leasing has been “sluggish” over the last two quarters. Only 63,000 square feet of space has been leased, which is a 68% decrease compared to the same period a year ago.
Industrial vacancies are at 0.9% in Santa Barbara, 7.1% in Goleta and 2.2% in Carpinteria.
Available space increased 39% during the first quarter. It is the largest inventory in nearly eight years.