More deals, development in South Coast CRE pipeline
When you’re serving up steak and eggs for nearly 300 people the market must be doing well joked Brad Frohling, principal for Radius Commercial Real Estate and event moderator for the firm’s 7th annual Radius Real Estate & Economic Forecast breakfast. The event was held at Fess Parker’s Double Tree Resort & Hotel in Santa Barbara this week.
And indeed South Coast investors, developers and brokers have plenty to laugh about as deals in markets throughout Santa Barbara and Ventura Counties produced record breaking metrics. There were 77 commercial sales, excluding apartments, through the first three quarters of 2014, which is the largest number recorded for the first nine months of a year in the past 16 years. Radius predicts commercials sales will top 100 by the year’s end. Going forward, the fourth quarter has typically been the strongest, accounting for an average of 33 percent of annual sales and signs look good that the pace of deals will remain solid, Radius’ forecast report noted.
Additionally, presenters at the forecast said that there have been more deals over $10 million than any time during the past 12 years since Radius started tracking that data. Top deals for owner-users included Curvature’s purchase of the 73,000-square-foot building they had been occupying at 6500 Hollister Ave. for $20.45 million and biotech company Karl Storz buying a 102,000-square-foot building located at 1 S. Los Carneros Rd. for $29.5 million. On the investor side,
the re-sale of the Starbucks Center on Coast Village Road for $14.5 million, the sale of 1 N. Los Carneros, formerly Santa Barbara Bank & Trust now Union Bank, for $29.5 million, and the sale of 75 Coromar, home to Raytheon, for $26.4 million, topped the list deals.
The big story for leases this year, which is expected to roll into 2015, is the shifting and downsizing of tenants in Goleta. The market is about to experience a dramatic increase in vacancy, according to Radius’ forecast. While vacancy is just about the lowest it’s been since 2007 at 7.3 percent — down from 12.2 percent this time last year — over the course of the next 6–12 months about 450,000 of additional square feet space will open up. Long-time major tenants like Allergan, Raytheon and Mentor, all in the midst of significant organizational changes, are consolidating their operations. FLIR and Karl Storz are moving into larger properties while also vacating their existing buildings.
In Carpinteria, due the market’s small size — roughly just 500,000 square feet — vacancy can swing dramatically. By the end of the third quarter vacancy jumped to 25.2% from 13.4% in the second quarter, Radius reported.
Still, buoying the broader market were multifamily residential sales. Apartment sales after the first quarter this year and in the third quarter very active on the South Coast with 16 sales of properties five units or more in size on the South Coast. This accounts for over half of all transactions year to date as the total for 2014 now sits at 27, according to Radius.
Interest rates remain low and appear to stay this way into at least the first quarter of 2015. CAP rates are averaging in the mid 4 percent range at 4.6 percent for the year.
Major deals include the sale of Harbor Heights Manor near Santa Barbara City College for more than $33 million, the sale of a five property, 55-unit portfolio in Isla Vista for almost $19 million, the sale of a 45-unit property at 1502 San Pascual St. in Santa Barbara for $12.5 million to the Turner Foundation, a local non profit, and the $7 million sale of a 28-unit complex at 203 Ladera St.
While it’s good news for landlords, it’s band news for renters as the market for rentals is expected to become even more expensive. Radius predicts that rates will rise between 5 percent and 8 percent through 2015. With nominal vacancy, rates continue to average around 0.7 percent for the Santa Barbara. Average prices are running between $1,400 and $1,900 for a one bedroom apartment depending on location.
Heading into 2015, new development up and down the South Coast is anticipated with numerous hotel projects in Santa Barbara, including the La Entrada and the Fess Parker Family’s scaled-back boutique hotel near the Double Tree — both are expected to progress into construction this year. Orcutt is making way for a large marketplace development and multifamily apartments are being pushed in both counties to meet demand.