San Luis Obispo County’s commercial real estate market isn’t in full recovery mode yet, but it is showing some signs of stabilizing as the economy eases out of recession.
Businesses less skittish about their prospects are filling up vacant spaces, real estate agents and building owners said. Moreover, landlords and potential tenants are now more realistic about rents, and a lot of older inventory on the market is starting to get absorbed.
“We just came out of a huge recession, but people are realizing that it’s all cyclical and the economy is bound to go back up again,” said Corban Holland, a sales agent for Pacifica Commercial Realty in Paso Robles. “People who had been sitting on the sidelines wondering when is it a good time to start getting back in are getting back in.”
Holland remains cautiously optimistic about commercial real estate in the North County, where much of the building occurred during the boom, but he has noticed more deals lately, including those in the restaurant sector, health care, real estate and general professional office.
The wine industry is also helping to take up spaces in Paso Robles, he said.
“We’re constantly surprised at how many more are moving into downtown Paso,” he said. “If there’s a retail space available, a winery takes it. You wonder how well they are doing, but they are still leasing them out left and right.”
Demand up in SLO
In San Luis Obispo, commercial real estate is holding its own, say those familiar with the market.
Matt Quaglino, president of Quaglino Properties in San Luis Obispo, said the perception is that there’s more vacant space than is available. He estimated that his spaces are about 95 percent occupied right now.
“Nothing new has been built in the last three years or so,” Quaglino noted. “So, the supply is dwindling and the demand is increasing.”
Preston Thomas, of Rossetti Co. in San Luis Obispo, said shopping centers, such as Irish Hills Plaza and Madonna Plaza, are doing well, and the retail market downtown is strong, with several new restaurants.
The weak spots are office spaces, particularly those below 1,000 square feet, which cater to smaller “mom and pop” businesses, he said. The tough lending environment has also proved challenging for some businesses wanting to expand.
“The only sales occurring would be seller financing or all cash,” he said. “You can get a conventional loan on commercial property, but it’s a slim chance.”
Overall, Thomas said, there has been a marked improvement in the market.
“The city of SLO it’s a bubble here,” he said.
While the situation in San Luis Obispo may be improving, the South County market remains soft, said Bruce Freeberg, an agent for Patterson Realty.
Freeberg does not keep statistics on vacancy rates; however, he said he believes there are going to be more vacancies and noted that commercial real estate continues to lag residential.
“It’s mostly due to the economy,” he said. “Businesses that have been in commercial spots are letting go of those leases, and that’s created cash flow problems for owners.”
Freeberg said many owners are putting their properties up for sale or letting them “go back to the bank.”
“Every situation will be unique, and some are doing fine, but I think you’re going to see more and more in distress.”
The weakest part of the commercial market, he agreed, will likely be offices.
“Some buildings that had been in families for years are owned free and clear, and even if there are vacancies, they can withstand it,” he said. “It’s the new ones with financing that won’t be able to hold on.”
In San Luis Obispo, one of the main drivers of the slow walk to recovery is recognition by building owners that they must come down on price, said Thomas, adding that many of the good deals have already been had.
He estimates there has been about a 40 percent drop in values and lease rates from March 2009. Building owners, he said, are realizing they cannot get the prices they could in the heyday.
“Without a doubt, landlords have gotten realistic,” he said. “Tenants are finally getting deals, and landlords are saying it sounds like a good deal for me. Are we better off than we were a year ago? I think we are.”
Quaglino said that it has become more competitive.
“We’re more apt to be more flexible on terms and willing to listen to a tenant’s needs if they’re reasonable,” he said. Some tenants want a month-to-month lease. He said there’s an upside and downside to short-term leases, and a landlord has to be comfortable doing that.
“When the market is good and space is limited, it’s not unusual for someone to sign a five-to-seven-year lease,” he said. “When things are as they are, it’s easier for a tenant not to commit to something that long. Everyone is cautious.”
Holland of Pacifica Commercial Realty estimated that rents have dropped in the North County by about 20 percent to 30 percent.
“Because of the length of this recession, I think that landlords are going, ‘I’ve been sticking strong to my lease rate, but the building has been vacant for a year, and maybe I need to budge a little bit.’ ”
Even so, there is a limit to concessions, Holland said.
“Tenants have been in the driver’s seat. However, we’re starting to see some of the space being absorbed, and that’s leveling the playing field.”