Demand has been marginal across every property class in the past year. Vacancy during the second quarter is 3.2%. The long-term average is 3.5%. In the luxury segment, vacancy is 7.5% after new inventory opened at the end of 2023. The overall vacancy rate is anticipated to remain relatively stable due to limited inventory growth and modest demand in the coming quarters.
Development has been steady, although not overwhelming, for a market with a structurally low vacancy rate. Like many Southern California markets, developers encounter obstacles, given local opposition groups and Coastal Commission restraints. A net of roughly 2,300 units have been added to inventory over the past decade. Although the state has tried to pass pro-growth legislation to aid apartment construction, it has still been an onerous process to bring new inventory to market, although a path might emerge.
Santa Barbara County did not meet California's deadline for updating its housing element at the end of 2022. As a result, Santa Barbara ceded control of some projects. The county must permit apartment projects by right if they include at least 20% of affordable units. That could bring new development to agricultural land near Goleta and Carpenteria. Santa Barbara was required to identify parcels to build upwards of 5,700 housing units by 2031. Local opposition will likely arise, but it may not be able to prevent some developments from moving forward.
Rents have changed by 2.6% year over year, compared with 1.0% nationally, and growth has been strongest in the Santa Barbara Submarket, which includes the downtown area. Renters have become much more price-conscious, and area landlords have noted that competition for renters at the front door has inhibited their ability to aggressively raise rents on available units. Rents have shifted by 1.6% in the past 12 months in 4 & 5 Star properties. Rent growth should be relatively stable and near the long-term norm in the next several quarters.
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