Santa Barbara’s Commercial Real Estate Market and Sustainability Trends Driving Change
Santa Barbara’s commercial real estate market is facing significant changes in 2025. Gene Deering, a partner at Radius Commercial Real Estate, shared valuable insights about the current state of the market. As the landscape evolves, sustainability has become a key consideration for investors and developers.
The demand for more sustainable buildings is rising, as businesses and tenants alike are prioritizing environmentally conscious choices. From retail to office spaces, sustainability is influencing market trends and investment decisions in Santa Barbara.
The commercial real estate market in Santa Barbara is notably disjointed in 2025, with varying levels of demand across sectors. Retail properties, especially in neighborhood centers and Montecito, are seeing strong demand. Lease rates are increasing, reflecting the vibrant retail market in these areas.
On the other hand, office leasing is slower, particularly for larger spaces intended for tech companies. Despite challenges in some sectors, industrial real estate remains robust, with both leasing and sales seeing continued strength. This mix of trends highlights the complexity of the commercial real estate market in Santa Barbara.
Investors are now showing more interest in specific types of properties. Rather than the previous trend of pure investment buyers, many are looking for properties with potential for value addition or conversion. Properties with opportunities for adaptation are especially attractive, as investors seek to unlock new uses or enhance existing ones.
The decline in investment transactions is partly due to the high cost of borrowing. With money market returns at 5%, the higher borrowing costs for real estate purchases are causing some investors to hesitate. This makes it harder to justify buying properties with returns around 5%, especially when the cost of capital exceeds this figure.
Sustainability plays a significant role in the shifting preferences of both investors and tenants. The market is increasingly prioritizing environmentally friendly and energy-efficient buildings. Many commercial properties are now designed to meet green building standards, such as LEED certification, reflecting the growing demand for sustainable real estate.
These properties not only help reduce environmental impact but also lower operational costs for tenants. The appeal of such buildings is increasing, especially as businesses face greater pressure to reduce their carbon footprint. Sustainable developments are not just beneficial for the environment—they also offer long-term financial advantages for both investors and tenants.
One of the most exciting developments in Santa Barbara is the transformation of the Macy’s building in Downtown Santa Barbara into apartments. This redevelopment project has the potential to bring much-needed housing to the area, revitalizing the downtown district.
The addition of new residential properties in commercial spaces could help address the housing shortage in the region, making it an important part of the city’s growth. Sustainable design elements will likely be incorporated into this development, making it a prime example of how commercial real estate can be adapted to meet both housing needs and sustainability goals.
Despite challenges, there are still opportunities for investors in Santa Barbara’s commercial real estate market. The key is to focus on properties that have the potential for conversion or adaptation to new uses. For example, older office buildings may be repurposed for residential use or transformed into mixed-use properties.
The emphasis on sustainability provides additional opportunities for developers to create buildings that not only meet market demands but also contribute positively to the environment. As the market evolves, sustainability will continue to be a driving force in shaping the future of commercial real estate in Santa Barbara.
Investors looking to enter the Santa Barbara market in 2025 are advised to remain proactive. While the market may seem uncertain, there are still plenty of opportunities for those willing to write offers and engage with motivated sellers.
As the market continues to shift, there will be opportunities for those who are prepared to act. Sustainability, in particular, will be a crucial factor in identifying properties with long-term potential. Investors who incorporate sustainability into their strategies are likely to be better positioned to succeed in the changing commercial real estate market.
