Demand has moderated notably since early 2022 as household formation has slowed due to persistent inflation, the rapid rise in interest rates and increasingly higher rents that are becoming out of reach for many. Demand has been underwater across all class segments during the past year with net absorption weakest in 1- & 2-Star properties. Those households continue to encounter significant economic stress.
The vacancy rate has shifted by 0.5% year over year to 2.7%. The long-term average is 3.7%. The vacancy rate is anticipated to rise in the forecast as new inventory outpaces demand and population growth stagnates.
Development has been steady, although not overwhelming for a market with a structurally low vacancy rate. Developers, like many Southern California markets, encounter obstacles to building given local opposition groups and Coastal Commission restraints.
A net of roughly 2,100 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 there might be a path emerging.
Santa Barbara County did not meet the state's deadline for updating its housing element at the end of 2022. As a result, Santa Barbara has ceded control of some projects beginning in 2023. The county will have to 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. Elements Apartments in Santa Maria consists of nearly 170 units and is scheduled to deliver at the end of 2023. It is geared toward urban living, and it is walkable and located near the jobs district. That property accounts for the bulk of the approximately 180-unit pipeline.
Overall rent growth has been 2.1% year over year and strongest in the Santa Barbara Submarket which includes the downtown area. Renters have become much more price-conscious since last year, and area landlords have noted that competition for renters at the front door has inhibited their ability to aggressively raise rents on available units.
Private local investors have been the primary players in the capital markets. Unlike larger metros in Southern California, investors tend to hold on to their assets for longer timeframes. The market is currently in a phase of pricing discovery as interest rates have risen rapidly since mid-2022 and many investors have taken a step back. That has led to transaction counts falling to the lowest level in years during recent quarters. Given the elevated cost of debt, cap rates will likely need to rise for some deals to pencil out.