Supply and Demand

Real estate prices in the beach cities have been appreciating at astounding rates for several years now. This holds true for both residential and commercial properties. It all starts with the growing popularity of living here. 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 to be in our communities as well.

The theory of supply and demand postulates that in a competitive and open market, the unit price for any good will eventually settle at a point where the quantity demanded equals the quantity supplied at current prices. Stated another way, the price of something tends to reflect the demand for it and how much of it is available to satisfy the amount of demand for it. Our limited supply of housing doesn’t match the increasing demand for it and so prices keep rising.

Since 1970, the number of housing units available locally 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 199 reported sales of all housing types last year, which represents maybe 2 percent of all households there. The bottom line is that the supply of housing is very limited whereas the demand for space here continues to grow, which subsequently drives up prices. This is evident in the impressive appreciation rates in all of the local areas that have been sustained for the past six years.

Given that in 2015 there were 16,507 Los Angeles County tax filers with incomes of over $1 million, it may be some time before affordability of exclusive homes becomes an issue. These fortunate earners had an average 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 qualifying incomes required to purchase the homes here. More retailers and other businesses want to be here to cash in on this. As a result, the demand for limited commercial space parallels what has been happening with residential home prices. Buyers of commercial properties here, 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 now 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.

This manifests in an interesting way for restaurants in particular. 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 access to a full liquor license. This coupled with high rent puts tremendous pressure on restaurant operators to hit their revenue targets if they want to recoup their investments within a short timeframe. This unrelenting pressure is likely to limit commercial lease rate increases, at least in Manhattan Beach, moving forward.