San Luis Obispo County’s commercial real estate market is on the move, bringing a host of new construction and redevelopment projects, investors and excitement about the future.
Bolstered by economic growth locally and nationally, the optimism is expected to continue this year as demand grows for more commercial space, said Steve Davis of Stafford-McCarty Commercial Real Estate in San Luis Obispo.
Davis, together with Steve McCarty, another real estate industry veteran, is a guest author for the Central Coast Economic Forecast San Luis Obispo County, and the UCSB Economic Forecast Project North County Santa Barbara. The Tribune recently asked Davis for his insight on the current real estate market and outlook for the new year.
Q: How would you describe the current state of the commercial real estate market in SLO County? Overall, would you characterize it as extremely healthy with high demand, healthy but with room to grow or still improving?
A: In general, the commercial real estate market on the Central Coast is healthy with more room to grow. Commercial vacancy is very low; there are many projects moving through planning and others that are already under construction.
Q: What would you say are the top contributing factors to the strength of the commercial real estate sector? Improvements in the overall health of the local economy, etc.?
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A: Overall, the biggest factors in the strength of the Central Coast commercial real estate market are the health of both the overall economy and the local economy.
The strength of the economy outside of our area is bringing investment money into the Central Coast, helping to fuel the growth and revitalization that we see both in existing projects and those projects still in planning. Investors are looking for returns on their capital and real estate returns are strong. Recently, we have seen a strong resurgence of 1031 Exchanges, which allow an investor to sell a property, reinvest the proceeds in a new property and defer all capital gain taxes.
The local economy is strong as well and, with increasing confidence, more people are willing to commit to new leases and new construction. If you look a little deeper into each of our communities, you can start to see different factors influencing each subeconomy.
Q: Which area of the county has seen the most growth in terms of the rise of new commercial developments and ability to quickly lease space? Which area has seen the least growth and why?
A: The city of San Luis Obispo and its surrounding area has seen the most growth in terms of new commercial developments. Walking around downtown you can see the different construction projects underway, and there are many others still working their way through the city planning process. The city’s Community Development website is currently tracking 42 commercial and residential projects in process within the city limits.
Each community in the Central Coast has its own growth momentum as it relates to commercial real estate. The filling of vacancies, or construction of new assets, requires demand for commercial space. That demand is driven by economic growth. Those communities that have vibrant city centers and clusters of businesses in a core area (technology, wine, craft beer, agriculture, etc.) see synergistic effects and a faster recovery and subsequent growth rate. Those communities that are not as strong in those areas, or have infrastructure and water issues, are seeing growth, just at a slower pace.
Q: How long are properties staying on the market? How does the current market compare to the lows seen during the recession?
A: As always, some properties can linger on the market for months or years and others can be released within days or weeks. In the current market, we are seeing even the habitually empty spaces lease up as the list of available alternatives dwindles. In general, the time on the market is decreasing, but there is still a wide range in the length of time it takes properties to lease or sell. The market is dynamic and as the vacant inventory shrinks, the price on the remaining spaces rise, which affects businesses’ decisions to move or expand.
Q: Where do you see the greatest need for commercial space in the county (more industrial space, health care, technology)? Do you foresee their needs being filled in the near future? What would be some reasons why they would not be met? Zoning issues?
A: The needs for specific types of commercial space fluctuates over time. Part of that is driven by available inventory, which at this time is low across most sectors. In the city of San Luis Obispo, there is very little industrial inventory, large or small. There are a number of larger office users looking for space and there is not any available. The challenge for new space is that it can take eighteen months to two years, or longer, for a project to move from concept to being occupied by a tenant.
Q: Are banks more willing to lend money to buy commercial properties than in the past?
A: Yes, the banks are back in the lending market and are looking for quality projects on which to loan.
Q: What’s your prediction, if any, for how the commercial market will shape up in 2016?
A: The commercial real estate market should continue to do well in 2016. Inventory of available space is low, so rents will increase. As rents rise, new construction becomes economically feasible, so new construction starts will continue. Looking at the backlog in planning departments throughout the county indicates that developers believe there is pentup demand for more commercial space, and the market response is currently indicating that, at least for the foreseeable future, they are on the right track.
Commercial Vacancy Rates (%), San Luis Obispo City Metropolitan Area, 2014. Source: Stafford-McCarty Commercial Real Estate