High bar set for 2015 in tri-county CRE markets
With the chapter closed on 2014, real estate brokers in the Tri-Counties have some significant benchmarks to compete with in 2015. Records were broken and deal volumes through the first three quarters of last year surged.
Still, as the fourth quarter of last year wound down, industry sources told the Business Times that some of the momentum from the previous quarters has tapered off slightly. However, interest from investors and deal activity in smaller and often underperforming markets are strong indicators for a positive 2015 outlook.
Likely one of the best signs that tri-county commercial real estate is thriving, is the number of retailers and service businesses, both chain and independently owned, that are looking for first, second or even third locations.
While space in cities like Santa Barbara is always sought after due to its assets as a travel and tourism destination, that intrinsic draw has expanded into Goleta. The area also claims a growing contingent of UC Santa Barbara students with disposable income.
One locally driven example is the expansion of The French Press. The Santa Barbara-based coffee purveyors staked a claim near the Camino Real Marketplace for its third location. The independent coffee business signed the lease in late December.
French Press owners Julia and Todd Mayer opened their first location in downtown Santa Barbara in 2009. On opening, the couple previously told the Business Times, they faced much skepticism and were told from the outset they would fail. However, the two were determined to deliver a better coffee experience. Five years later, the company is sourcing and roasting its own coffee beans and is on the verge of opening a third location.
In other markets, such as downtown San Luis Obispo, the number of new developments, including plans for a new public market, make many developers and brokers the Business Times spoke with, bullish on their hopes for 2015.
“Time will tell once receipts from the season are tallied, but all signs point to a merry Christmas for retailers,” said Michael Martz, a broker with Hayes Commercial Group. “The stock market recently reached record highs, interest rates remain near historic lows, and jobs reports indicate an improved employment picture.”
The dramatic drop in oil prices put extra money in consumers’ pockets during the holiday season, Martz said, which has helped the retail segment reach stabilization and even modest growth. Hollister Village Plaza, a 76,000-square-foot neighborhood shopping center currently being constructed in Goleta is just one more indicator that retail is rolling forward.
“This trend should continue into 2015 as consumer confidence continues to build and memories of the Great Recession fade,” he said. “That being said, most consumers are still price-sensitive and seeking discounts that erode profits. Thus retailers have remained calculated in their expansion plans, with a focus on quality locations in proven markets.”
Going forward, most of the leasing activity is expected to come from food and beverage uses.
Industry knowledge says retail always follows people, so while Santa Barbara has seen some new infill development of apartments, cities including SLO, Ventura and Santa Maria are getting developers’ attention.
The Towbes Group is building nearly 500 new housing units in Santa Maria with two new apartment projects. The effort is the largest development of rental housing in the city in more than 20 years, and there’s room for more, company and city officials said.
“Development of housing in the area for the last 25 years has been mostly single-family homes,” Craig Zimmerman, president of The Towbes Group, previously told the Business Times. “But that’s really starting to change. The demand for apartments is growing as households are really changing.”
Zimmerman said that the shift toward more apartment development is caused by a number of factors, including young people forming households later, jobs being more mobile and the incredible cost of buying a home in coastal California.
Developer John Ashkar also recently secured a $33.1 million construction loan for Parklands Apartments, a 173-unit, high-end apartment development in Ventura. Ashkar’s firm Westwood Development is in the process of permitting and developing several hundred units in the city of Ventura and elsewhere in California.
“Housing starts, development applications, issued permit numbers, and the money is back and cheap on the streets, and is almost as cheap for the Jone’s buying their first or second homes,” said SLO-based developer and co-founder of PB Companies Ryan Petetit. “Consumer confidence is gaining momentum again, and big players are starting to notice our community as a place to expand big business. Amazon.com now has offices in San Luis Obispo. Mindbody and Rosetta are begging to really take shape and attract more of their kind to our community.”
According to Hayes broker Christos Celmayster, the 2015 deal market on the South Coast for apartment properties will follow the bullish trend established three years ago.
“Nearly 30 apartment sales were completed in 2014, a remarkable total inflated by portfolio liquidation by one seller which accounted for eight sales,” he said. “Expect fewer sales in the coming year, but it will remain a strong seller’s market with rents on the rise, low interest rates, and limited inventory. Apartments are still the preferred real estate class for investors, driving demand far beyond supply. We will continue to see relatively high listing prices, competitive bidding, multiple offers and concomitant downward pressure on capitalization rates.”
The same price inflation and demand are also driving commercial sales in office and industrials properties. With a limited amount of top class properties still available in the more attractive markets, investors, including major REITs, are widening their sights to other submarkets like Camarillo.
“Strong demand over the past three years has driven prices up to levels that will induce typical owners to entertain selling,” said Kristoper Roth, a broker with Hayes. “As a result, we expect to see more property offered for sale in the coming quarters as owners try to time the current market cycle. There is still ample buyer demand to meet an expansion in inventory, and pricing will remain relatively elevated through 2015.”
Hayes Industrial broker Dan Moll added that the coming year will feature a continuing gap between inventory and demand, with most of the user demand generated by retail wine and beer, high tech offices, and private storage.”
Heading in 2015, big end-of-the-year deals like the $430 million sale of Kimpton Hotels to a UK-based operator and Albertsons & Safeway’s divesture of 164 stores — 20 of which are located in the tri-counties to grocery retailer Haggen, surely set the tone. Most of the industry bellwethers and experts point to a strong 2015, but last year’s records should be a tough year for dealmakers to surmount.