For decades, the Golden State has been known for its dynamic entrepreneurial scene. With more than 4.2 million small businesses, California has the highest concentration of such companies in the United States, spread across a smorgasbord of, California commercial real estate.
The state's business environment is particularly suitable for import-export activities, international trade, real estate, transportation, and warehousing, as well as for companies involved in professional, scientific, and technical activities.
California is also appealing to large corporations and multinationals. There are 53 Fortune 500 companies headquartered here, including Apple, Alphabet, Cisco, Visa, Uber, and Salesforce.
The abundance of mixed-use real estate makes it easy to find a property type to suit any budget and search criteria.
The best locations for business include San Francisco, Santa Monica, Palo Alto, Redwood, Yorba Linda, Torrance, Thousand Oaks. In addition, some areas have a very active startup scene, as is the case of Los Angeles, where there are some 4,000 venture-backed startups.
Some key factors drawing new businesses to the state include the accessibility to a highly skilled workforce, an established business scene that provides plenty of opportunities for networking, excellent national and international transportation links, and a solid economy since California is the US state with the highest GDP.
Office Market in California
Overall, the California office market is characterized by high activity levels across the board, with many sub-markets coming close to pre-pandemic levels in terms of transaction volumes. The most active office sub-markets in terms of transaction volumes are:-
- The Bay Area
- San Francisco
- Los Angeles
- San Diego
- Orange County
San Francisco & The Bay Area
San Francisco's office market has a total inventory of 100 million square feet, and has recently been marked by a flight to quality, and increased demand for Class A space as many tenants see this move as a way to incentivize the team to return to the office. This trend is reflected in significant differences in vacancy rates across asset classes: vacancy rates are only 16% for Class A offices but exceed 22% for Class B and Class C space.
Overall, leasing activity remains high, even though there is a performance gap between San Francisco and other Bay area sub-markets in terms of rental values. For example, rents in San Francisco are down from 2020 averages, but are increasing for office properties in other parts of the Bay Area. Class A space in San Francisco averages $70 / sq ft, Class B is short of $55/ sq ft, with the priciest offices being in the Financial District ($61) and SOMA ($65), whereas the lowest asking prices are in Mid Market and Waterfront / North beach, at $30 and $25 / sq ft respectively.
Silicon Valley, the region of Northern California synonymous with high technology and innovation, is the leading destination for corporate offices in the tech sector, but requirements and transaction types are undergoing changes and evidencing a shift towards a smaller footprint. Total office inventory exceeds 128 million square feet and vacancy rates average 12%, although they're higher in Santa Clara and Campbell, whereas single-digit vacancies exist in Cupertino, Mountain View and Sunnyvale.
Los Angeles has nearly 200 million square feet of office space, and nearly 70% of the total inventory is Class A space, with the biggest concentrations in the CBD and Westside.
Vacancy rates for all classes average 21%, and unlike in other locations, they're higher for Class A than for Class B offices. Asking rents for Class A assets average $4 / sq ft (fsg) and $3 / sq ft for the remaining classes.
In terms of tenant profile, downtown LA has experienced the most obvious changes, with a switch from tech and media as the main occupier to professional services.
San Diego has 78 million square feet of office space, evenly split between Class A and Class B assets.
Vacancy rates for all classes average 11%, and are slightly higher for Class A properties. The lowest vacancy levels are in East County and south San Diego. On the other hand, downtown San Diego has the highest vacancy rates at 20% in the metro area, since the city has been affected by remote and hybrid work trends, which have triggered the flight to quality that's also evident in other markets.
Asking rents average $3 / sq ft (fsg) across all classes, $3.7 for Class A and under $3 for B and C Class offices.
Most activity is driven by demand from tech sector, especially in Eastgate, Sorrento Mesa and Rancho Bernardo.
Affordable rents and a central location make this area attractive to businesses looking to establish a presence in California, with search criteria, outside of the priciest locations. Most office inventory is located around the airport area and South County.
The impact of remote and hybrid work has turned Orange County into a predominantly tenant-favorable sub-market, characterized by high office availability and declining rents. Vacancy rates for all classes exceeds 15% and asking rates average $2.8/ sq ft (fsg), with barely a 50-cent difference in average rates for Class A and B space county-wide.
Sacramento is lagging behind other office markets in the state, since average rental values are declining and transaction volumes are below pre-pandemic levels (15). Moreover, the office market in the state's capital city is also affected by a downsizing trend both from private and public sector occupiers.
Vacancy rates hover around 10% and average asking rents are $2.5 / sq ft (fsg) for Class A and $$2 for Class B. The highest rents are in East Sacramento, and the lowest in Highway 50 Corridor.
Retail Market in California
This is one of the largest retail markets in the United States, known for being home to some of the priciest retail space, especially in the LA area. At an average of $35 / sq ft, retail rents in Los Angeles widely surpass the national average. Outside of luxury retail locations in this city, the best-performing sub-markets are Long Beach and Torrance.
San Francisco's retail market is recovering post-2020, supported by an above-average median income and decreasing unemployment rates. Most demand comes from restaurants and entertainment venues, especially in established sub-markets like Union Square and Post Street. Average vacancy rates for retail properties are just below 6%, and asking rates average $40 / sq ft.
Industrial market in California
The state has a total industrial inventory of nearly 780 million square feet, where the largest sub-markets are LA Central and South Bay.
The Inland Empire region (located in Southern California) is one of the top industrial markets in the United States. Overall, this is a well-performing market with healthy absorption levels, increasing rental values, and minimal vacancy rates -the lowest in the US.
In Los Angeles, vacancy rates for industrial space are under 1%, and direct asking rents average $1.8 / sq ft. Rental rates are higher for newly built industrial space and for lease renewals of top-quality properties.
Business Incentives and Programs
As of 2022, some of the key incentives available to California-based businesses include:-
- California Competes Tax Credit
- New Employment credit
- California Small Business Loan Guarantee Program
- California Capital Access Program
There are also industry-specific incentives for businesses involved in film, television, R&D, manufacturing, and alternative energy.
In addition, expense deductions, small business grant programs, and other incentives are available through local authorities to help with the costs of business equipment, real estate, and other qualifying expenses.