El Segundo: the Little City that Did

El Segundo may not be a large population city, but when it comes to business, this city cranks out big numbers while continuously redefining itself. The city General Fund revenues match those of adjacent Manhattan Beach, which has double the number of residents. Of course, there is a big difference in how the revenues come in, providing an interesting study in contrasts.

Recent retail developments such as the Point, Elevon, and the upcoming Apollo Landing are a precursor to a number of other projects in the works that will ensure continued revenue growth in El Segundo for years to come.

For both cities, 60 percent to 70 percent of the general fund revenues are found on just four line items: property taxes, business license fees, sales taxes, and transient occupancy taxes. For Manhattan Beach, a disproportionate amount comes from property taxes. This is not surprising, given that the median home price in Manhattan Beach over the past six months was $2.44 million, compared to $1.24 million in El Segundo. Revenues from the other categories are much higher in El Segundo, as would be expected given its tremendous business base. Having a population that quadruples during the day as well as close proximity to LAX certainly helps the sales tax and transient occupancy tax revenues.

For decades, El Segundo has often been referred to as the Aerospace Capital of the World because of the significant presence of aerospace companies. However, fluctuations in the aerospace industry presented a risk to the city with respect to revenues. The city adapted by promoting a business-friendly environment that favors innovation across different industries. In 2007, the top 10 employers in the city employed over 28,000 people. Last year this number dropped to just over 17,000 people. This represents a dramatic shift in the composition of the employment base and underscores the success the city has had with overcoming the impact of a once relatively undiversified business base.

The changes are far from over. In the last year or so, we have seen the opening of Elevon and The Point. Apollo Landing, a new, fast, casual restaurant on bustling Rosecrans Avenue, is set to open later this year. All six units in the three buildings were leased before the buildings were delivered to the tenants. The Lakers will move in to new executive offices with a practice arena around the corner from the Los Angeles Kings. Within a year, we will see the opening of the $13.8 M aquatics center near the Lakers facility and adjacent to the new Da Vinci Charter School along Douglas Avenue. At some point, development will start on the 25 acres between The Point and Continental Park on Rosecrans.

All of this activity has caught the attention of a lot of businesses, which pumps up the demand for space. Dave Binney, a partner in Cypress Retail Group, represented the ownership of the Apollo Landing development and has been involved in retail and restaurant real estate transactions in El Segundo and the South Bay for over 22 years. He said, “Lease rates along the Rosecrans corridor are higher than in any other South Bay area, outside of downtown Manhattan Beach.” He hinted that there are more development projects in the early planning stages that have yet to be announced within the El Segundo. The small city has demonstrated how a city can adapt to changes in the business climate and flourish.

 

As seen in Easy Reader / Photo by Kevin Cody
Photo: Lakers coach Luke Walton, of Manhattan Beach, lent his star power last September to the Lakers and UCLA Health announcement that they are partnering in a 120,000-square-foot medical and training facility at the Elevon hotel, restaurant and retail development, just east of Sepulveda Boulevard in El Segundo.)

Commercial Properties in the South Bay

Commercial vacancy rates in Manhattan Beach are impossibly low. Demand for space downtown has become so high that we are seeing $10 per square foot lease rates, double what they were just six years ago. This sounds enticing for an investor, but good luck finding a property to add to your portfolio.

Sales of commercial properties here are almost as rare as Strand home sales.  In fact, the most heavily trafficked online commercial real estate site, LoopNet, did not have a single commercial property listed for sale in Manhattan Beach at the time of this writing. Many properties have remained with families for generations, some for over 60 years. This has investors looking elsewhere and the Sepulveda corridor has become the new mecca.

We are in the midst of a serious transformation from Marine Avenue on south into Hermosa Beach.

What is somewhat surprising about this is that just a few years ago the lease rates on Sepulveda were curiously consistent along the entire axis, from LAX through the Riviera Village on PCH, including Manhattan Beach. However, we have seen commercial lease rates in Manhattan Beach along Sepulveda double in just the past two to three years. Given that the value of most commercial property depends on a multiple of net income, it’s like winning the lottery.

Maryl Binney of Highland Partners Corp. cites the “limited opportunities in downtown Manhattan, the repositioning of the Sepulveda corridor, and strong traffic counts” as key factors driving this jump. She adds that “desirable demographics and high disposable incomes make the area increasingly attractive, to retailers in particular.”

However, Binney emphasizes that it is really the “repositioning and increasing availability of larger parcels” that has created the opportunity for major retailers to enter the market. Binney should know. She represented the developers in leasing the Gelson’s project, which consists of 34,000 square feet of retail space, while her colleagues at Highland Partners represented the seller of the El Torito Grill property last month, to longtime investor Stuart Sackley.

The classic definition of the capitalization rate, or cap rat, is the rate of return on a real estate investment based on the income that the property is expected to generate. All things being equal, it remains a fair way to gauge the relative merit of opportunities in different locations. Yet, “all things” are rarely equal. Lease rates can increase at different paces in different areas. The concept of the repositioning of Sepulveda, as alluded to by Binney, has manifested in a significant increase in the demand for space, which in turn has resulted in the rapid increase in lease rates.

Sackley has been buying up properties on Sepulveda for 20 years and has amassed close to 200,000 square feet of land. He likes the “high car count” and his ability to “keep his spaces leased without much effort.” It’s that simple. No investment models or cap rate calculations are required for him. The fact that Forbes recently placed Manhattan Beach in the top one-tenth of 1 percent out of 29,500 zip codes tracked nationwide certainly doesn’t hurt.

The substantial investments being made on Sepulveda from the Manhattan Village Mall to Walgreens, Manhattan Toyota, Target, Gelson’s, and the Skechers expansion, among other projects, continue to transform the corridor and yield impressive returns for investors there.

 

As seen in Easy Reader / Photo © Easy Reader

Success in a Changing Hermosa Beach Downtown

We are closing in on the 20th anniversary of the ribbon-cutting ceremony for the opening of Pier Plaza in downtown Hermosa Beach. What may have started as an “experiment”, in the words of one former city councilman, has had a profound impact on the city. In some ways it is like watching chaos theory playing out in real time. Businesses had great success in the early years. However, this resulted in more noise, crowds and general disturbances that elicited a strong reaction from the community. City leadership took several measures to increase the safety and enjoyment of the Plaza for everyone. Business revenues have been declining since and there remain ongoing concerns about safety. The opening of the Plaza, it would seem, triggered a wide range of actions and reactions, that have left the city, business owners and residents struggling to find an underlying order to it all.

Any effort to determine if opening the Plaza has improved the city is likely to elicit a range of responses. Objective measures are clearly mixed. The city budget continues to grow. Property values and commercial lease rates are at an all-time high, which would suggest that the demand for space here is as strong as ever. On the other hand, business turnover is relatively high as revenues continue to decline. This may be an artifact of classic business cycles playing out or it may be a sign that some businesses have been slow to adjust. Regardless, change is inevitable and businesses may need to adapt moving forward.

It has been almost seven years since the unveiling of the EPA award-winning Upper  Pier Avenue Beautification Project in early 2010. In spite of this successful project, sales tax revenues for the city have continued to decline at a time when they are rising in neighboring Manhattan Beach. Theories abound for the falloff in revenues, but simple explanations remain elusive. Yet, within this chaos, some businesses are thriving.

Sharkeez opened on the Plaza in June 1997. The ownership identified an opportunity to add a second concept there in late 2011 and a third one this year. I had a chance to speak to Greg Newman, president of the restaurants, about the changes in Hermosa over the past 20 years and the huge risks they have taken with Palmilla and Tower 12. He noted that there was “way more foot traffic 15 years ago” and since then a “lot of effort has been expended by the city and business owners to keep the area safe from trouble-makers but it has impacted business”.

As for today, “It takes money and wherewithal to succeed”. Before opening Palmilla, they did “extensive research”. The food had to be excellent and the décor stunning. They hired a “kick-ass chef” as well as a world-renowned designer to help with this and it has worked out brilliantly. Tower 12 evolved very differently and presented even more risk, being on the second floor. There was no doubt that the food had to be exceptional and so an “unbelievable investment had to be made” in the kitchen. The design pulled on Newman’s experiences growing up in Hermosa and is proving to be a hit.

Palmilla and Tower 12, which both were significant departures from what has worked on the Plaza in the past, have “substantially exceeded expectations” and have demonstrated that seeing past the chaos of the ever-changing business environment can yield unqualified success. Within the chaos of any business climate, it is still possible to find a genuine need and to fill it.

 

As seen in Easy Reader / Photo © Easy Reader
Photo: Mayor Pete Tucker cuts the ribbon during unveiling of the Upper Pier Beautification Project on October 6, 2010. The mayor is flanked by (left to right) City Manager Steve Burrell, Councilman Sam Edgerton, Planning Commissioner Dan Marinelli, Councilman Michael DiVirgilio, Planning Commissioner Dean Nota, Councilman Kit Bobko, Planning Commissioners Kim MacMullen, Pete Hoffman, Jerry Gross Janice Brittain and Councilman Jeff Duclos.