Goleta Office Leasing
In 2019, the Goleta office leasing market maintained its trajectory of high demand and leasing activity, coupled with absorption of available space. At year-end, the vacancy rate reached its lowest level in at least 15 years at 5.3%. This represents a 37% contraction of available space year-over-year and a 52% contraction since the cyclical peak in 2016.
For Goleta, 2019 was a record year by practically every metric. The unprecedented 52 transactions resulted in net absorption of +143,000 SF. Also unprecedented, 22 of the leases were for spaces larger than 10,000 SF. Largest among these were Apeel’s lease of 105,257 SF at 71 S Los Carneros Rd, and Inogen’s lease of 48,821 SF in a building under construction at 301 Coromar Dr. The average gross rental rate for the year was 17% higher than five years ago, though inflation-adjusted rents are still about 10% below the pre-recession levels of the 2000s.
Curvature’s footprint in Goleta shifted during 2019, as the server hardware reseller leased 17,747 SF of new space at 859-861 Ward Dr, while also contracting to 31,000 SF at 6500 Hollister Ave. Several tenants signed leases at 6500 Hollister Ave to backfill former Curvature space, including Strategic Healthcare Programs’ lease of 29,372 SF and Vitamin Angels’ signing of 11,464 SF.
Goleta’s momentum appears to be sustainable for the near future, though we don’t anticipate much more decrease in vacancy, near term. Google’s widely publicized breakthrough in quantum computing at 301 Mentor Dr helped elevate the city’s name recognition and profile as a burgeoning spot for R&D. Barring a significant downturn in the economy, we expect demand for office and R&D space to remain strong, and Goleta’s star will continue to rise.
Santa Barbara Office Leasing
Santa Barbara office leasing in 2019 held par with the previous year with 94 transactions, though gross absorption dipped 16% below the prior five-year average. The trend line of office vacancy in Santa Barbara has been gradual expansion from the cyclical low rate of 3.8% at midyear 2015 to a peak of 6.8% at midyear 2019. Since that apex, vacancy contracted to 6.0% at year-end, which remains a high rate historically. Elevated vacancy hasn’t diminished the upward trend in average achieved rents, which in 2019 were up 13% against the prior five-year average. In fact, the average rate surpassed $3.00 gross per SF, the highest rate since 2008, after adjusting for inflation.
You may be wondering to what extent high retail vacancy and other challenges facing State Street have contributed to higher office vacancy. One interesting correlation to note is that retail vacancy along the State Street corridor also began its cyclical climb in early 2015, paralleling the expansion in Santa Barbara office inventory. In addition, we have heard directly from office tenants who feel that working downtown has lost some of its appeal in recent years.
On the other hand, demand to be downtown, especially among creative office users, appears to be as strong as ever, as evidenced by several notable downtown deals by tech firms in 2019, including the renewal by Sonos of its 27,217 SF creative office building at 614 Chapala St. Honey Science subleased 18,792 SF in adjacent buildings at 530 Chapala St and 25 W Cota St. Most recently, BrightMarket (FastSpring) leased 5,092 SF at 200 E Carrillo St in the fourth quarter. And of course, Amazon’s newly opened 45,000 SF office in the former Saks building at 1001 State St is a boon to the area’s tech credentials. Companies looking to join these tenants downtown will find several large spaces available, including 19,000 SF at 1020 State St, 13,713 SF at 29 W Anapamu St, and 12,381 SF at 936 State St.
Our perspective is that the problems downtown have contributed somewhat to higher office vacancy, but so has the recent resurgence of interest and activity in Goleta, which has increased competition for office tenants on the South Coast. If the economy continues at modest growth, we don’t anticipate Santa Barbara office vacancy will rise much above 6%, but it will likely remain near that level for the near future.
Carpinteria Office Leasing
Carpinteria showed limited office inventory and minimal leasing activity with just a handful of leases in 2019. The one notable deal was Procore’s lease of the 24,030 SF building at 6384 Via Real. This was an industrial/R&D building long occupied by Northrop Grumman that Montana Avenue Capital Partners (MAC) purchased and then leased to Procore with plans to convert it to creative office space.
MAC will also soon break ground at 6380 Via Real on Carpinteria’s first new office development in nearly 20 years. The campus will feature 80,000 SF of class A office space on 8.6 acres and is being marketed for lease.