Coastal Realtors say high-interest rates will likely continue to have a dampening short-term effect on the expansion of commercial retail, office, and restaurant space in La Jolla and Pacific Beach.

But the upside is that, despite tight current financial times, beach commercial real estate will remain a profitable undertaking for investors in the long run.

“Commercial real estate prices have been reduced by 20% to 30% from all-time highs in 2021 and early 2022 when the interest rates were 3% to 4%,” said Tony Franco of Franco Realty Group in Pacific Beach. “Now we’re seeing deals north of 10%. The result is you are going to see development start to slow down. With all the projects we’re looking at now, there is going to be a lag in the economy. Those are the headwinds.”

Commercial Realtors Seth Pite and Lev Mizan of Infinity Investment Properties, which covers Pacific Beach and La Jolla, noted the current commercial market has changed from pre-COVID and pandemic times.

“There is going to be a lot more opportunities arising in the upcoming year,” was Pite’s upbeat prediction. “The market we’re in presently is much different than it was 1 ½ to 2 years ago when low-interest rates and people were being supported by money from the government.”

Investor perception of the PB commercial market is changing too.

“There is beginning to be a bit more of a high-end feel in PB,” argued Pite. “We’re seeing a lot of investors and players coming into the market from outside the City and even out of the country. We just closed escrow on Australian companies who’ve invested in The Yard Gym, and a new fitness wear location in the 1400 block of Garnet Avenue. The desirability of the community has increased a lot.”

Mizan concurred with Pite’s take. “We’re seeing these international companies wanting to take advantage of the market here in coastal communities,” he agreed. “When you see a rise in interest rates, like we have now, you have a buyer’s expectation of their returns going up. Now that interest rates have come up, the government has closed the spigot of cash flow (to fight inflation). With interest rates staying pretty high, prices need to come down.”

Besides much higher interest rates today, Franco noted that “the cost of insurance has gone up a lot to do these (development) projects.” However, he added there is some compensation in the form of developer incentives the City is giving. He cited an example. “Wasabi Sushi at 2662 Garnet Ave. (near I-5) is going to be redeveloped with 70 units as mostly multi-family and low-income,” Franco said.

Franco pointed out another somewhat surprising change in the local commercial real estate market. “Office space has been pretty resilient in PB and La Jolla with vacancies getting filled up by small businesses,” he noted. “There is a big push on from people getting sick and tired of working from their home. We need to have personal interaction with each other. Working from an isolated and depressed environment is not very healthy.”

Mizan is optimistic about the future of coastal commercial real estate noting the “California lifestyle” will always be a big draw. “People want to live by the beach and, naturally, businesses want to be there too, especially retail,” he said adding, “That makes it super attractive for investors.”

Pite believes the current economic doldrums will eventually turn around. “It’s an advantage for some tenants to be patient and look around for other opportunities that arise,” he concluded.

RECENT COMMERCIAL TRANSACTIONS BY FRANCO REALTY GROUP

2830 Garnet Ave. – future development with 75,000 square feet of land on the busiest corner.

4617 Cass St. – leased out an old laundromat to a gym.

2912 Mission Blvd. – sold to a new restaurateur who opened a new coffee shop.

3782 Ingraham St. – sold to a ramen-style restaurant.

870 Garnet Ave. – seasonal Christmas tree lot sold to a developer.

5575 La Jolla Blvd. – sold to a developer.

2662 Garnet Ave. – in escrow. Will have over 60-70 units built.