Economy, State Woes Drive Forecast

In addition to factors like the above that are specific to California, the report by Hayes notes, the South Coast market is facing the same economic and credit market factors that are shaping the commercial real estate markets around the country and the world. The office market vacancy rate has risen by 12.2% in the South Coast, with the biggest rises coming in Santa Barabra and Carpinteria.

The Hayes Commercial forecast says that, despite some encouraging signs, "A recovery in the commercial real estate market during 2009 is not likely." With the economy and the capital markets still in question, it states, "Many stakeholders in our area are acting as if they expect the current environment to persist for some time. Nevertheless, with the pendulum still swinging in favor of tenants, investors and potential owner-users, we continue to viewthis as a rare moment of opportunity. There are deals to be found now that would have seemed like a dream even one year ago." The report further observes that, "We are cautiously optimistic that the positive signs we are now starting to see are the early harbingers of recovery to come."

Santa Barbara's office vacancy has more than doubled over the past 18 months, according to the Hayes Commercial report. The report notes further that although Goleta's vacancy has decreased slightly in the past six months, its current level of 10.6% is still higher than the vacancy spike caused by the high-tech fallout of 2001-2003, when companies such as Ericsson, Hewlett Packard, and Microsoft from the South Coast.

As office tenants and landlords on the South Coast contend with the ongoing recession,several trends have emerged. On average, tenants are taking smaller spaces, often a result of cost-cutting through staff reductions, space reductions reductions, or both. Manytenants with expiring leases are pursuing short-term extensions instead of newlong-term leases in order to keep their options open. This is in spite of landlords offering incentives such as free rent and improvements to tenants willing to sign long-termleases. At the same time, some companies are taking advantage of the deals being offered by landlords to get intomore desirable spaces. Office vacancy has continued to rise, reaching8.3%, driven by a 10% increase in sublease space since the beginning of the year. Thislarge inventory has pushed South Coast achieved office rates down nearly 11%to $1.90GR and asking rates down 4.2%to $1.95 GR per square foot.

Hayes Commercial's Steve Hayes and Francois DeJohn, the founding partners of the firm, have brokered the six largest office leases on the South Coast this year, according to an announcement by the firm, including the leasing of 39,875 square feet at 6550 Hollister Ave. in Goleta, where the Hayes brokers represented building owner Park One LLC. The deal was not only the largest office lease of the year but also the largest lease of any type on the South Coast in 2009, according to the brokerage firm. The other five office deals ranged from a 15,404-square-foot lease in Carpinteria to a 28,350-square-foot deal in Santa Barbara.