2019 Q4 Retail Leasing: Easing vacancy on State Street amid robust leasing in Santa Barbara

Santa Barbara Retail

It was a busy year for retail leasing in Santa Barbara, amounting to 69 retail transactions, the highest count in 10 years. However, the heavy deal volume had little effect on vacancy, which actually expanded by about 10% year-over-year for the city as a whole.

Storefront vacancy on the State Street corridor (400 to 1300 blocks) continued the trend of contraction from the peak of 14.9% in late 2018 to 10.0% currently. While still a high rate—and double that of five years ago—we anticipate a return to single-digit storefront vacancy in 2020.

State Street saw 23 retail transactions during 2019, including several notable leases in the fourth quarter. The 11,450 SF space at 530 State St—formerly Samy’s Camera—was leased by an unnamed tenant planning to convert the building to a restaurant concept. Urban Outfitters renewed its lease of the 10,217 SF building at 624 State St, thereby keeping a national retailer on the scene. Pascucci leased the 2,824 SF restaurant space at 509 State St for an imminent move from its longstanding location at 729 State St. Also on the 500 block, Institution Ale leased the undeveloped lot next to its existing location for a beer garden expansion.

As the Paseo Nuevo mall nears completion of its $20 million facelift, the future of the former Macy’s building is still undecided. There is no shortage of ideas being floated, as you would expect over the course of a three-year decision process, and the mall even conducted an online survey for community input. Our best guess is that it will end up being a combination of food hall, retail, and a high-end cinema.

Since an outside consultant’s report on Santa Barbara’s downtown economic vitality was delivered last June, the City and other organizations have taken steps to turn things around. Last August, the City hired a downtown business liaison to facilitate permit review, and its newly hired Economic Development Director will reportedly be announced in February. Concurrently, the Downtown Organization has presented a schedule of new initiatives and events to bring more people and businesses to the State Street corridor.

Another crucial piece in the puzzle is rental rates, which have decreased enough to alleviate storefront vacancy for five consecutive quarters, while allowing more local retailers and restaurateurs to try their concepts on State Street. How much have rents come down? For the 600 to 1000 blocks of State, the average gross rent for 2019 was 35% lower than in 2016. This signals a difficult capitulation by landlords, but a rational one, given that storefront vacancy on those blocks was 73% higher in 2019 than in 2016.

State Street appears to be getting back on track, with vacancy easing and tangible steps being pursued to address problems facing downtown. While the shift from deliberation to action seems overdue, it is welcome nevertheless.

Goleta Retail

Goleta’s retail leasing market has shown remarkable long-term stability as the vacancy rate has been below 3% for eight consecutive years. Calle Real Center, which had been carrying about 20,000 SF of vacancy for over a year, saw fourth quarter leases by Coast Supply Co, Cottage Clinics, and Mathnasium totaling nearly 10,000 SF. The 21,000 SF anchor space in the Plaza Center at 7127 Hollister Ave remains the largest availability, and several spaces comprising about 18,000 SF are available in Magnolia Center. The disparity we have been tracking between east and west Goleta persists, with the area east of the airport bearing 62% of the vacant space, while the average asking base rent is 37% below what is asked in the western portion of the city.