2021 Q2 Office Leasing Update

The “future of the office” has been a hot topic as experts speculate what impact remote work has on how­—and how much—office space will be used going forward. Now that we are in the vaccine phase of the pandemic, there are early indications where office use may be heading in our market. Anecdotally, we are aware of companies who plan to downsize offices because of a pronounced shift to remote work. However, it seems that the majority of tenants are expecting to return to their office spaces at full or near full capacity, and leasing activity—particularly in Q2—reflects that. The volume of office lease renewals returned to pre-pandemic levels, with virtually all tenants keeping their existing square footage. More than 150,000 sf of office space has been renewed to date. In addition, the average leased space size has remained consistent with pre-pandemic sizes. Admittedly, we are still in the pandemic with conditions evolving, but our current best guess is that most office users will end up working at the office most of the time, and over the longer term, demand for space in our market will not deviate substantially from historical trends.

[This is an excerpt of the full midyear market report, which is available here.]

Santa Barbara

Santa Barbara’s office vacancy continues to grow into uncharted territory, a trend that started before the pandemic. The 10.8% vacancy rate at midyear is the first double-digit rate on record, and the inventory of 108 spaces available is also a new high mark. The conversion to office of the upper two floors of the Ortega Building (former Macy’s) at Paseo Nuevo added approximately 87,500 sf to the market. However, even without that building available, the city’s vacancy rate would still exceed 9%. In recent months, two sizable downtown office buildings have been listed for sale or lease: the 19,597 sf office building vacated by Stantec Consulting at 111 E Victoria St, and the 17,128 sf building leased by PayJunction and others at 12-14 E Carrillo St. Also newly listed is 14,562 sf of creative office at 530 E Montecito St. Meanwhile, new vacancies at the Riviera Business Park on Alameda Padre Serra have extended total availability there to 21,814 sf.

On the bright side, Santa Barbara leasing activity has rebounded with vigor so far in 2021. Transactions at midyear outpaced the pre-COVID 5-year average by 12%, while gross absorption was up 14%. There were several large renewals, including 14,364 sf at 1014 Santa Barbara St renewed by Morgan Stanley; 13,880 sf at 530 E Montecito St by Lion Re:Sources; and 11,534 sf at 223 E De La Guerra St by Impact Tech. These prominent examples of tenants both staying put and not downsizing provide food for thought on the future of office demand. Most of the leasing to date has been traditional office tenants, including financial services, legal, and real estate firms.

Average achieved rents have increased slightly, compared to 2019, which indicates the pandemic has not induced a softening of rates. However, if high vacancy persists, prices will inevitably be pressured by market conditions favoring tenants.

By the time this report publishes, the Nordstrom building at Paseo Nuevo will likely have a new owner, who reportedly will market the upper floors of that building as office space. This repositioning of retail floors to office could easily push Santa Barbara’s vacancy rate above 13%. There are office tenants interested in portions of the Ortega Building, which is promising. However, attracting enough 20,000+ sf tenants into downtown to fill two former retail anchor buildings will be a very tall order. In other words, Santa Barbara’s vacancy rate will likely be in the 10% range for the foreseeable future.

Goleta

Goleta’s office deal flow to date has rebounded compared to 2020 but is still trending below pre-pandemic levels. Transactions and gross absorption are down 20% and 35%, respectively, compared to pre-COVID 5-year averages. Nevertheless, recent leasing has produced net absorption of 64,000 sf year-to-date, trimming the vacancy rate down to 5.1%.

The two largest leases so far this year backfilled office buildings vacated by LogMeIn: Asylum Research leased 38,401 sf at 7416 Hollister Ave in Q1, and L3 Technologies leased 40,487 sf at 7414 Hollister Ave in May. There were also several large renewals in Q2, including 16,631 sf at 315 Bollay Dr secured by Alcon Research and 13,116 sf at 150 Castilian Dr renewed by CACI. Two leases totaling 15,745 sf were signed at 125 Cremona Dr, bringing the 82,132 sf former Medtronic building to 95% occupancy. Rents have held steady despite the pandemic economy, and the average achieved rate at midyear was 10% above the prior 5-year average.

The largest available spaces are 38,183 sf at 326 Bollay Dr, formerly occupied by Inogen, and the 31,499 sf space at 6310 Hollister Ave vacated by Asylum Research. Both tenants relocated within Goleta. Finding tenants for these large spaces could take some time, while demand for spaces under 20,000 sf remains healthy.

Carpinteria

Office leasing in Carpinteria perked up in Q2 with 5 transactions totaling 17,000 sf. All of the leases so far this year have been small spaces, with one exception: 10,060 sf leased at 6383 Rose Ln by an unnamed tenant in Q2. The vacancy rate is relatively low and stable at 4.0%. However, the inventory has become fairly stagnant; on average, the available spaces have been on the market for more than 5 quarters.