PacBiz Times: Nordstrom building conversion could lead to glut of Santa Barbara office space

The Nordstrom building in downtown Santa Barbara is in the final steps before it sells, and the new owner is looking to turn the upper floors into new office space, according to a report from Hayes Commercial Group.

Hayes did not name the buyer or seller. Most of the Paseo Nuevo outdoor mall is owned by Pacific Capital Partners and Silverpeak Real Estate Partners, but those companies do not own the Nordstrom building.

If the new owner decides to convert the upper floors to office space, the Nordstrom building would follow in the footsteps of the Ortega building at the other end of Paseo Nuevo. That building, the former home of Macy’s, was turned into office space after it couldn’t attract a new retail tenant or be converted into apartments.

Converting the Nordstrom building to office space would also push the Santa Barbara office vacancy rate even higher than it is now. The city’s office vacancy rate is currently 10.8%, the highest Hayes has ever charted. If two new floors of offices were added to the market and not immediately filled, the report estimates the office vacancy rate could rise as high as 13%.

In the rest of the report, Hayes Commercial took a look at the South Coast and found the local commercial real estate market is recovering, but still has a long way to go.

The first quarter of the year was relatively quiet, with around $86 million in transactions on the South Coast of Santa Barbara County. That number ballooned to $135 million in the second quarter, as pent-up tenant demand surged, with 93 lease transactions, the highest quarterly count in the past five years.

Commercial sales are showing a dramatic increase from 2020, as transactions and dollar value are up 37% and 140%, respectively, but are still below pre-pandemic levels. Compared to pre-COVID five-year averages, transactions and dollar volume are down 8% and 12%.

Hospitality properties are on the market, too. There are five hotels for sale in Santa Barbara, including the Hotel Santa Barbara, which is listed for $49 million, and the Franciscan Inn, which is being offered for $21.7 million.

There’s a lot of room in the market right now, as inventory is at a record high, but that doesn’t translate to vacancies. The commercial real estate firm found that most local sub-markets hit a pandemic vacancy peak in the third or fourth quarter of 2020, with the exceptions of Santa Barbara office and Santa Barbara retail, where vacancy rates continue to rise.

Santa Barbara office vacancies are in “uncharted” territory, according to the report, which listed the 10.8% vacancy as the first double-digit rate on record. There are 108 spaces available, which the report noted was also a new high.