Midyear update from Hayes Commercial

The commercial real estate recovery along the South Coast remained bumpy in the first half of the year, according to the latest report from Hayes Commercial Group.
“The first half of 2013 has maintained the good news/bad news pattern that we have seen throughout the economic recovery, which officially turned four years old in June. And like most 4-year-olds, this recovery is still on training wheels,” the firm said.

The South Coast’s CRE market was busy in the first six months of the year, Hayes said, but the activity wasn’t spread evenly across all submarkets. Even so, the numbers paint a pretty solid picture of recovery: Gross absorption – that is, total square footage leased – is up 47 percent when annualized against last year, Hayes said. It should be noted that a substantial portion of the volume came in the form of large lease renewals, the firm said. Asking and achieved rents both increased a modest 3 percent when averaged across all commercial real estate types.

To anyone following the news, it should come as no surprise that hotel deals have dominated the South Coast commercial real estate market’s sales. The Bacara Resort Spa, the Santa Barbara Hyatt and the Holiday Inn in Goleta (now called Hotel Goleta) have all changed hands, totaling almost $300 million by my calculation. Other CRE sectors haven’t held up as well on the sales front, though – Hayes found that commercial sales activity in Santa Barbara is down about 20 percent compared to last year’s historic pace, but that’s still on par with pre-recession norms.

Montecito also seems to be attracting a lot of investor attention. The report noted that three properties in the wealthy enclave changed hands in the second quarter, including the old firehouse building at 1486 East Valley Road, which sold for an “eye-popping” $2,517 per square foot.

Another notable feature of the recent sales market has been the return of off-market deals, the firm said. Over the last year and a half, about 45 percent of CRE sales in Santa Barbara have been properties that were not actively on the market. “The primary cause of increased off-market sales boils down to supply and demand,” Hayes said. “Thanks to low interest rates and an improving economy, there is currently a surplus of qualified buyers looking for property, and the market inventory is relatively limited. As a result, more desirable assets are often sold before they have a chance to hit the market.”

Owner-users continue to be a strong force as well, with such buyers snapping up 13 of 27 properties in Santa Barbara so far this year. Expect that rend to continue, Hayes noted.

On the leasing front, things are generally a little slower, especially with office tenants. While Santa Barbara’s office market saw vacancy decline in the first six months of the year, Goleta and Carpinteria saw availability spike 29 percent. Santa Barbara’s limited supply, coupled with strong demand for downtown space, help explain the discrepancy, Hayes said.

In Goleta, available office space has increased by 23 percent since the beginning of the year and the vacancy rate – 12.7 percent – is among the highest Hayes has on record. “The surplus of availability has resulted from a continuing lack of demand from larger users; however, that trend appears to be reversing. In the first half of 2013, the volume of transactions crawled along at the slow pace set in 2012, with only 47,000 square feet of space absorbed by new leases,” the firm said.

On the bright side, several major Goleta employers are planning to move or expand in coming months. They include Deckers Outdoor Corp. Flir and Yardi Systems. “These shifts will have a ripple effect, causing smaller users to move as well and increasing new leasing activity in the second half of the year and into 2014,” Hayes said. “At least a half dozen users are already actively looking for new space.”