By Brian Johnson
Santa Barbara Association of Realtors
Last year saw a steep decline in leasing activity across all markets in our area but we were seeing the office sector rebound quite nicely through the first half of 2021. However, that demand has slowed in the 3rd quarter, due mainly to the rise of the Delta variant of COVID-19. There were a number of companies planning to bring their workforces back into the office that postponed those plans until early 2022. This led to a decline in the number and size of leases. Where Santa Barbara had seen office absorption in the 60,000 to 70,000 SF range over the last three quarters we saw less than 40,000 SF of absorption this quarter. Goleta also saw a drop in leasing activity this quarter down to approximately 45,000 SF. Carpinteria actually saw a nice uptick in their leasing activity but since the market is so small even a few leases can cause big swings in vacancy rates.
These declines were evident on the average lease rate for leased office spaces as well. Santa Barbara had been seeing average lease rates in the $3.10 to $3.25 per square foot range for the first two quarters of this year but the 3rd quarter saw that average achieved lease rate drop to $2.62 per square foot. The primary contributor to this is probably due to the majority of the leasing activity happening in the B and C class of properties and not commercial property owners discounting their properties more.
The vacancy rate for offices in Santa Barbara declined ever so slightly to 10.4% but Goleta’s office vacancy rate actually rose to 6.9%. Neither saw much change in the average asking rate for their respective markets, giving additional evidence to the idea that property owners are not making large discounts to their asking prices. While these vacancy rates may not seem high compared to other markets around the country, Santa Barbara’s office vacancy rate generally ranges from 5% to 7% most years. Goleta is actually doing quite well compared to Santa Barbara right now due to companies having more choice of buildings with larger office floor plans so they can better plan for the new office environment.
Given how California has handled the latest surge I believe that the office market will pick back up towards the end of this year. Vaccination rates continue to rise and positive cases have been falling as of late. We should see a stronger 4th quarter and 2022 is expected to be a strong year for leasing as more and more workers return to the office. While I do not expect the “Office is Dead” headline to go away anytime soon, I am confident that the office sector will come back in new and better ways.
Brian Johnson is a California licensed real estate agent and the Managing Director of Radius Commercial Real Estate. Brian handles all types of commercial real estate transactions but has a special focus on multifamily investments. He can be reached at 805-879-9631 or firstname.lastname@example.org