Santa Barbara has a cluster of aerospace, healthcare, and defense-related employment, including companies associated with the Vandenberg Air Force Base.
But the presence of those industries has not been sufficient in the market side-stepping some of the broader dislocation in the office environment that has spread across the country since 2020.
The vacancy rate has climbed to 6.4% during the second quarter, reaching its highest level in the past decade. At the end of 2019, vacancy in Santa Barbara was below 4%. Since the start of 2022, only two quarters have seen positive absorption. Demand has pulled back as firms continue to evaluate their space needs, which has often resulted in smaller footprints and highlighting efficiency during peak office attendance. That is especially true among larger occupiers.
The average new lease size over the past two years has fallen roughly 10% compared with the stable leasing period between 2015 and 2019. That trend is not unique to Santa Barbara and is expected to continue through the coming quarters. New quarterly leasing activity has averaged roughly 100,000 SF over the past eight quarters.
Santa Barbara does face some supply pressure. The former Nordstrom's on State Street in Santa Barbara is being redeveloped into office space and is part of Paseo Nuevo, the mixed-use commercial hub. The 165,000-SF development is scheduled to open in 2024.
Rents have shifted by 0.6% over the past 12 months, compared with 0.7% nationally, as rent growth has moderated amid leaner office demand. Rent growth is not expected to materially improve in the coming quarters.
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