Despite having a relatively high cost of living and above-average business costs, California remains one of the most sought-after destinations for companies who want to establish their presence in the US business scene. According to Bloomberg, this is partly due to the state's focus on productivity and to its proactive approach tackling issues that matter, such as environmental concerns, urbanization, and globalization. A highly skilled workforce, low unemployment rates, and an established reputation for being a global tech center contribute to keeping the commercial real estate market in California in a leading position.

Office Market

Overall, the office property market in California is characterized by heightened activity levels and an above-average number of large-scale transactions. The main centers of activity are Los Angeles, San Francisco, and San Diego.

In the Greater Los Angeles area, the office property market has experienced a decrease in availability and a slight increase in average rental rates. According to Cushman & Wakefield, vacancy rates are currently at the lowest level of the past 7 years, averaging 16 per cent in the metro area. In several sub-markets, vacancy rates are even lower, reaching single digit figures, especially in Burbank, Glendale, and Orange County. High absorption levels have mainly been driven by large transactions coming from the tech, entertainment, financial, and legal sectors. Asking rates have grown moderately and average $2.73 / sq ft / month. Demand for space is particularly high in West Los Angeles and the San Gabriel Valley, where direct asking prices average $3.81 and $2.27 respectively. Elsewhere in the metro area, Class A properties are priced between $3.06 (downtown LA) and $2.28 (North LA).

The LA office market has also seen an increasing demand for space coming from the creative sector. Market analysts at Cushman & Wakefield drew attention to the trend, noting that between 2013 and 2014 alone, demand for dedicated creative space in LA grew by 10 per cent. The report also revealed that demand for creative space is particularly high in areas like Santa Monica, Venice Beach, and Marina Del Rey. This trend is expected to continue, and demand will most likely grow at a fast pace until at least 2018.

In San Francisco, rental values have increased by 12.8 per cent on a year-on-year basis and now stand at $63.30 / sq ft / year. Vacancy rates have also gone down substantially, dropping 340 basis points in just one year. Average vacancy rates for offices in the city are 6.4 per cent. Leasing activity has been consistently high across most sub-markets, but especially in South Financial, Yerbabuena, and East SOMA. Nearly 60 per cent of all office tenants in San Francisco have ties to the technology sector and are able to afford higher rents. The highest asking prices are in North and South Financial ($67.51 and $67.30 respectively), Jackson Square ($61.23), East SOMA ($61.51), and Potrero Hill/Mission Bay ($58).

The San Diego market shares many characteristics with San Francisco, as rental rates keep going up due to limited supply and increasing demand. Vacancy rates in San Diego average 12.1 per cent, and rental values stand at $2.35 / sq ft / month. Market analysts predict that these trends will begin to be evident even in areas where demand was traditionally lower, such as Carlsbad, Encinitas, and Escondido. Significant construction activity is underway in Del Mar Heights, UTC, and 8th Avenue. The highest average rents are clustered around Del Mar Heights ($4.19), Solana Beach ($3.70), La Jolla ($3.60), UTC ($3.59), and Mission Valley ($3.00).

Click here for office space in Los Angeles, Irvine, San Francisco and San Diego.

Retail Market

Retail properties are in high demand across the state. In Los Angeles, vacancy rates are down to 5.2 per cent and average prices range between $3.59 / sq ft in Wilshire to $6.63 in downtown LA.

However, the San Francisco retail market is well on its way to outperforming all other Californian markets. Here, vacancy levels are as low as 2 per cent in the city core, and rents have increased by over 14 per cent, reaching average values of $600 / sq ft / year. Retail space in core San Diego centers shows virtually no availability, and Class B space is becoming increasingly limited. In this market, average asking rents are $1.90 / sq ft / month.

Business Incentives and Programs

Some of the key incentives available to California-based businesses include:
- California Research Credits
- Enterprise Zone Business Expense Deductions
- California Competes Tax Credit
- California Capital Access Program
- Small Business Loan Guarantee
Further information about these and other programs and tax breaks available to local businesses can be obtained from the Governor's office of Business and Economic Development website.