They’re not making it anymore.’ — Mark Twain
‘by Tony Cordi
Beach Cities real estate prices have been appreciating at astounding rates for several years, both residential and commercial. Our schools, beaches, and business districts have been attracting an increasing number of people to the area, which in turn increases the appeal to retailers and other businesses
Since 1970, the number of local housing units has remained relatively flat, based on the stabilization of the population since then. The current Manhattan Beach population has hardly changed in the past 50 years. Also, our housing turnover rates are way below the national average of 7.5 percent. In Hermosa Beach, there were just 199 reported sales of all housing types last year, which represents just 2 percent of all Hermosa households.
The bottom line is that the supply of housing is very limited, whereas the demand for space here continues to grow. This is evident in the impressive appreciation rates in all of the local areas that have been sustained for the past six years.
In 2015 there were 16,507 Los Angeles County tax filers with annual incomes of over $1 million. These fortunate earners had an average annual income of $3.38 million each and thus could easily qualify to buy the 13 reported homes sold on The Strand in Hermosa Beach and Manhattan Beach in 2017, at an average price of $11.8 million, if so inclined.
As housing prices rise so too do the incomes required to purchase the homes here. Retailers and other businesses want to be here to cash in on this. As a result, the demand for the limited commercial space parallels what has been happening with residential home prices. Buyers of local commercial properties, if they can find them, have been willing to accept lower capitalization rates. In other words, they will take on an investment with a return on their investment at about half the national average. Similarly, lease rates have blown through their record highs. In downtown Manhattan, we are seeing $10 per square foot lease rates, which is double the average in downtown Hermosa.
We have one of the few markets in the country where restaurant space can command what might be loosely referred to as “key money,” regardless of the success of the departing tenant. Most new tenants have to pay substantial upfront fees to get in. We are seeing these fees exceed $400,000 in the Riviera Village and $1 million in downtown Manhattan for space that includes a full liquor license. This coupled with high rent puts tremendous pressure on restaurant operators to hit their revenue targets. Moving forward, these pressures are likely to limit commercial lease rate increases, at least in Manhattan Beach.
Tony Cordi is a commercial real estate consultant with the Innate Group. He can be reached at Tony@TheInnategroup.com.