South Coast office leasing has not shown convincing signs of recovery since the pandemic slowdown in 2020. The gross consideration of $68 million in 2021 was 26% below the prior 5-year average and only modestly higher than 2020. On the bright side, transactions increased 28% from 2020, and average achieved rent increased 4.5%. During the pandemic, demand has favored the higher quality, “class A” office space, while less improved space has been harder to lease. Landlords of vacant class B or C space face a tough decision whether to spend money on improvements or lower the asking rent.
[This is an excerpt from the full market report, which is available here.]
As the pandemic wanes, and the risk to most employees and their families decreases, it will be interesting to see what “new normal” emerges for office use. During 2021, most offices we encountered were not as densely occupied as before the pandemic, and many—particularly in the tech sector—were practically empty. Looking at the local data, during the pandemic there has been no significant change in the average size of office space leased or in the number of renewals. Anecdotally, there have been a lot of tenants signing renewals without changing their footprint, and yet there are also a significant number of tenants moving to smaller spaces, so the jury is still out on this question.
Santa Barbara’s office leasing volume was close to pre-pandemic levels, posting 106 transactions totaling 343,000 sf. Six of the eight largest transactions by square footage were renewals. With many employees still working remotely due to the pandemic, most large tenants facing an end of term are opting to renew—sometimes while giving up or subleasing some of their space—rather than moving to a new property. Most recently, Well Health renewed 14,476 sf at 1025 Chapala St, and HUB International Insurance renewed 14,158 sf at 40 E Alamar Ave, both in December. Aside from renewals, there were plenty of small leases and very few large ones, as has been the case during the pandemic. This is partly due to tenants “right-sizing” to smaller spaces combined with a shortage of larger tenants looking for space in Santa Barbara. The year’s most sizeable new signing came in Q4 as Ontraport secured 23,760 sf at 2030 Alameda Padre Serra. They had occupied suites in the complex for many years, spread across several buildings, and this move allowed them to consolidate all of their employees in one building. In another Q4 deal of note, Fluidstance leased 13,667 sf of creative office at 402 E Gutierrez St, the former RightScale building.
Santa Barbara’s vacancy rate continues to flirt with double digits, ending the year at 9.6%, which represents a slight contraction from 10.8% at midyear, the highest vacancy rate on record. Inventory is showing some stagnation, as about half of the spaces for lease have been available for more than a year. Based on recent deals and current requirements we can anticipate decent demand for smaller spaces in the near future, especially as the Omicron variant recedes. Demand for large spaces is harder to foresee. The vacant upper two floors of the Ortega Building at Paseo Nuevo have attracted interest, but no leases have materialized yet. As previously mentioned, the new owner of the Nordstrom building at Paseo Nuevo is expected to market the majority of the building to large office tenants. When this happens, the vacancy rate could easily approach 12%, with a surplus of space in the 20,000-plus sf range and scarce demand from large office tenants to meet the supply. Setting aside these offerings at Paseo Nuevo, there is still 85% more space available in Santa Barbara than there was five years ago.
Leasing velocity was limited in Goleta’s office market during 2021, with gross absorption 5% lower than 2020 and 40% below the prior 5-year average. However, the tepid volume did not cause an expansion in available space. The vacancy rate was below 6% for the entirety of 2021 and finished the year at a record low of 5.2%. Achieved lease rates increased 7.5% compared to 2020, and have achieved nominal growth of 33% over the past 10 years. Taken together, the indicators reflect a market that is stable but in low gear.
There were only five transactions totaling 21,000 sf in Q4, including a renewal by Microsoft on 7,035 sf at 5383 Hollister Ave. Majestic Asset Management was Goleta’s busiest landlord in 2021, signing 13 leases that comprised 65% of the total square footage leased. These included the year’s two largest leases, signed by L3 Technologies and Asylum Research at 7414 & 7416 Hollister Ave, which are 40,400 sf and 38,400 sf buildings purchased by Majestic in 2020. Majestic also purchased the three-building campus at 110-150 Castilian Dr in April 2021, and has since signed deals there totaling 44,000 sf with CACI, AppFolio, Scalable Commerce, Serimmune, Mechanics Bank, and Odulair.
There are eight spaces available larger than 10,000 sf, five of which have been on the market for more than a year. The two largest spaces are 38,000 sf at 326 Bollay Dr vacated by Inogen and 31,500 sf at 6310 Hollister Ave vacated by Asylum Research. Finding tenants for the larger vacancies continues to be challenging, though demand for smaller space remains relatively stable.
Carpinteria’s vacancy rate contracted significantly from a relatively high 7.4% at the beginning of the year to 3.5% at year-end. Leasing momentum petered out in Q4, but there were 10 leases for the year, which is on par with the pre-pandemic average. However most of the leases were for smaller spaces and all but two had terms of 36 months or less. As a result, gross consideration was very modest at $1.2 million, second only to 2020 as the lowest annual total on record. Five spaces have come to market in the past few months, including two suites totaling 7,615 sf at 1145 Eugenia Place, in addition to 3,370 sf at the former Big Yellow House (108 Pierpont Ave) in Summerland, which is back on the market after a three-month pause.