In our Q3 report we concluded that South Coast commercial sales had fully recovered from the pandemic recession, and Q4 activity put an exclamation point on that assessment with $283 million in non-hotel sales, the highest quarterly volume on record. Strong demand converged from both investors and owner-users, and at every price level. The prospect of rising interest rates may have added extra motivation to buyers. The year closed with 117 sales valued at $770 million ($524 million excluding hotels), all record-high totals.
[This is an excerpt from the full market report, which is available here.]
Looking at the activity by city, Santa Barbara was the primary locus of the surge in deal flow. Its 89 transactions and $340 million in non-hotel volume were 53% and 78% above the 5-year averages, whereas activity in Goleta and Carpinteria generally matched recent historical trends. Transactions were also heavily skewed toward the latter half of the year, which yielded twice as many deals as the first half. In fact, dollar volume in the latter half of 2021 surpassed every full-year total on record except 2019.
Two Santa Barbara hotels were acquired by billionaires in recent months. In Q4, Diane Hendricks purchased the 75-room Hotel Santa Barbara at 533 State St for $41.9 million, following Bill Foley’s purchase of the Hotel Californian for $130 million in Q3. Completing a State Street hotel trifecta, the Hotel Indigo on the 100 block also sold in Q4 for $18.7 million. If you were considering scooping up a hotel at a bargain price while the hospitality industry is in recovery mode, these three hotels all traded for more than $1,000 per sf, not exactly “COVID-discount” pricing.
On the retail front, a local development team purchased most of La Cumbre Plaza—including the Macy’s anchor building and surrounding parking areas—for $63 million. A month earlier, the Nordstrom building in Paseo Nuevo was purchased for $13 million by an investor. Both buyers will reportedly be pivoting the properties away from retail as the primary use, which echoes a pattern emerging in cities across the country. The La Cumbre Plaza buyers are planning a large residential redevelopment, while sources say the Nordstrom building will mainly be converted to office space. There were five retail property sales on State Street in downtown Santa Barbara, and four more within a block of State. One notable example is the Public Market at 38 W Victoria St, which was purchased by the local Winn-Twining family partnership, with Travis Twining looking to build on Marge Cafarelli’s creation. When combined with the prominent hotel sales, this group of buyers represent new ownership blood willing to have a stake in downtown, despite the challenges facing that commercial zone.
Industrial property traded in record quantities of 26 sales valued at $74 million. In Q4, 1150 Mark Ave in Carpinteria was purchased for $6.3 million by Avantor/NuSil for its own use. For the year, 20 of the 26 industrial sales were owner-user buyers, including the Santa Barbara County Foodbank which bought a 78,000 sf facility at 80-82 Coromar Dr in Goleta, as well as a number of wealthy individuals who purchased small industrial properties in Santa Barbara for personal use (i.e. man-caves). Across all commercial property types, 47% of transactions were owner-user buyers, which is on par with the recent historical average. While owner-users made nearly half of the transactions, those sales only represented 16% of the total dollar volume.
Office property sales did not repeat the remarkable volume seen in 2020, and the $154 million transacted in 2021 was 11% below the prior 5-year average. In Q4, Apeel’s 105,000 sf building at 71 S Los Carneros Rd in Goleta was purchased by an investor, which is the fourth time the property has sold in the past 20 years. It’s a flex building rather than pure office, but it still fetched $344 per sf on the strength of the tenant. In downtown Santa Barbara, two large office buildings recently changed hands: the 14,000 sf building at 21 E Victoria St—leased to Green Hills Software—sold for $10.3 million, while the 19,600 sf building at 111 E Victoria St was purchased by an investor, with UCLA Health lined up to lease the entire building. Office investments traded at an average cap rate of about 5.5%, which is consistent with pricing prior to the pandemic.
A record 49 off-market sales were recorded in 2021, which reflects high-demand conditions. At the same time, the number of on-market sales also established a new high mark of 68 transactions, most of which closed in Q3 & Q4. Consequently, inventory for sale decreased 27% from midyear and ended 2021 at its lowest level in three years.
Turning ahead to 2022, there is evident and persistent baseline demand for commercial property from both owner-users and investors. The two factors with the greatest potential to limit deal flow in the coming year are lack of supply and rising interest rates. The pandemic could also hinder sales momentum if a super-variant emerges, but at this point the pandemic is not expected to be a major factor.
Concerning supply, the fourth quarter flurry of sales depleted inventory, leaving only 60 properties on the market, which may constrict deal flow somewhat in coming quarters. However, the last time inventory was this low was year-end 2018, and 2019 proved the be a record year for sales volume. In other words, the number of properties being marketed for sale is an imperfect indicator of the number owners willing to sell. Nevertheless, given the sheer number of sales (both on- and off-market) in recent months, it may take a quarter or two for the supply of willing sellers to recover.
On the question of interest rate increases, the impact on demand will depend on how much the Fed raises rates to address inflation, and predictions as to the timing and size of increases vary substantially. Demand appears strong enough to endure incremental changes, whereas the “sticker shock” of larger rate hikes would likely sideline a segment of buyers. In any case, the prospect of rising rates may motivate buyers to compress their timelines in order to secure financing and complete their purchases while rates are still low.