What’s New in South Coast Commercial Real Estate?

Many features that make the Santa Barbara area a great place to live – the alluring coastline, mountainous backdrop, excellent colleges, and small-town scale – also contribute to its relatively stable commercial real estate market, providing steady tourism, a well-educated employee base, and constraints on new development. However, our relatively secluded enclave is not immune to broader economic trends, including online shopping, higher interest rates, and many employees favoring hybrid work. Here are some highlights from our new quarterly report, available in full at HayesCommercial.com.

Commercial Real Estate Sales Cooled by Investor Caution

Following a strong finish in 2024, commercial sales activity was sluggish in Q1, continuing the overall trend of the past two years. There were only 11 transactions along the South Coast totaling $30 million, the lowest Q1 total since 2009. 

Investor hesitancy prevailed amid high interest rates and inflexible seller pricing, with only two investment sales completed during Q1. One highlight was a $1,300 per square foot retail/office acquisition on Anacapa Street in Santa Barbara, showcasing that buyers are still willing to pay a premium for prime, well-located assets.

There were other silver linings as well. The owner-user segment showed strength with nine sales, slightly above the historical average. The most notable was a $4.6 million purchase of a 7,400 square foot office building on Calle Laureles in Santa Barbara. Off-market deals dominated, accounting for nine of the 11 sales – signaling quiet but confident buyer activity despite the wider slowdown.

Inventory of property for sale grew 31% during Q1, due both to below-average transaction volume and the preponderance of off-market sales. The current inventory of 68 properties for sale is the most since the end of 2022.

Demand appears more discerning and frugal, reflecting economic uncertainty and financing constraints. Investors – while less evident this past quarter – are still alert to opportunities, especially well-located properties or value-add projects with substantial upside. Demand from owner-users is also shaping the market, as they have found more properties available to choose from while investors maintain a more cautious stance.

Commercial Leasing Shows Positive Signs Amid Challenges

While broader shifts in retail have proved challenging for the South Coast’s shopping malls, the steady supply of local businesses, reflecting Santa Barbara’s entrepreneurial energy, continues to keep overall retail vacancy relatively low at 3.1%, while making it easier for shoppers and diners to “keep it local.”

For Montecito’s Coast Village Road, vacancies created by recent store closings have been leasing quickly, reflecting strong demand for this premium corridor. Recent signings include Healing Arts Spa at 1236, Everything but Water bathing suits at 1253, and Dr. Gundry Wellness at 1187. The only available space is the former Legacy storefront at 1137. On the other side of the freeway, new restaurants and shops are open for business at The Post.

The downtown State Street corridor has seen slight improvement, with storefront vacancy at the lowest rate in the past five years, though still high by historical standards. Leases were inked in Q1 by Pascucci restaurant, Ghirardelli Chocolate & Ice Cream (its 20th U.S. location), Mevra Kamaci clothing and jewelry, and Arrediamo rugs. The arrival of fresh tenants, combined with the new Community Benefit Improvement District (CBID), provides positive momentum toward revitalizing downtown Santa Barbara.

Office leasing on the South Coast in recent quarters has remained relatively stable, with tightening vacancy in Goleta offset by expansion in Santa Barbara and Carpinteria. While overall demand for large office continues to be uneven, the market has showed resilience, particularly in smaller spaces and renewals.

Goleta’s office vacancy rate dipped below 6% – a dramatic improvement from double-digit highs a few years ago. Major Q1 leases included a 21,000 square foot renewal by Kollmorgen Corp and new deals from Anduril Industries and CIO Solutions.

In Santa Barbara, office vacancy remains lofty at 10.5%, though several key leases showed stability. American Riviera Bank renewed 13,000 square feet downtown, and CrossnoKaye extended its lease on 7,000 square feet in the Granada Tower. While companies are generally choosing smaller spaces – two-thirds of Q1 leases were under 2,000 square feet – they are often willing to pay for desirable locations and modern amenities to help draw employees to the office. Professional office users (such as financial advisors and legal firms) have held sway, as demand from tech companies has softened, evidenced by Sonos and Umbra Space making moves to Goleta.