California’s commercial real estate (CRE) market is often a bellwether for broader national trends, given the state’s diverse economy, vibrant tech sector, and vast population. As we move through 2024, the state’s commercial real estate landscape continues to evolve in response to economic shifts, changing work environments, and long-standing challenges like housing shortages and rising costs. Investors, developers, and tenants are all navigating a complex market that presents both challenges and opportunities.
Here’s an in-depth look at how the California commercial real estate market is performing in 2024 and the trends shaping its future.
1. Impact of Rising Interest Rates on CRE
Just like in the residential market, rising interest rates have had a significant impact on commercial real estate in 2024. The Federal Reserve’s ongoing efforts to control inflation through rate hikes have created challenges for commercial property financing.
Increased Borrowing Costs: Higher interest rates have made it more expensive to finance commercial properties. As a result, some investors are holding off on new acquisitions or developments, leading to a slowdown in transaction volumes across certain segments of the market.
Price Adjustments: Property valuations are adjusting as the higher cost of capital limits what investors are willing or able to pay. This is particularly true in markets that experienced rapid appreciation during the pandemic.
Shift Toward Creative Financing: To navigate these higher costs, many developers and investors are turning to alternative financing methods, such as joint ventures, seller financing, and private equity partnerships, to continue pursuing deals.
2. Office Sector: A Market in Flux
The office sector in California has been one of the most heavily affected by the pandemic, and its recovery has been uneven. In 2024, the demand for traditional office space remains below pre-pandemic levels, as hybrid and remote work models continue to shape corporate real estate decisions.
Hybrid Work and Downsizing: Many companies are opting for smaller office footprints as they continue to embrace hybrid work models. This has led to an increase in office space availability, particularly in major cities like San Francisco and Los Angeles. Vacancies are still elevated, and landlords are offering more flexible lease terms to attract tenants.
Flight to Quality: Despite the challenges, high-end, amenity-rich office spaces in prime locations are performing better than older, less attractive properties. Tenants are prioritizing modern office environments that cater to the needs of today’s workforce, with features like wellness spaces, enhanced technology, and energy-efficient designs.
Office Conversions: In response to increased vacancies, there has been a growing trend of converting office buildings into other uses, such as residential apartments, mixed-use developments, or life sciences labs. These conversions are especially popular in urban areas where there is high demand for housing.
3. Industrial Real Estate: A Standout Performer
The industrial sector continues to be one of the strongest segments in California’s commercial real estate market. Fueled by the ongoing growth of e-commerce, supply chain modernization, and the reshoring of manufacturing, demand for industrial spaces like warehouses, distribution centers, and logistics hubs remains high.
Low Vacancy Rates and Rising Rents: In key markets like the Inland Empire, industrial properties are in such high demand that vacancy rates remain extremely low. This has led to rising rental rates, making industrial real estate one of the most lucrative asset classes for investors in 2024.
Expansion of E-Commerce and Last-Mile Delivery: The continued expansion of e-commerce has driven up demand for last-mile delivery centers located near major urban hubs. As consumer expectations for fast delivery times grow, businesses are increasingly looking for industrial spaces closer to densely populated areas.
Sustainability in Industrial Spaces: As businesses focus on sustainability, there is growing interest in green industrial properties. Warehouses with energy-efficient features, such as solar panels and advanced HVAC systems, are becoming more attractive to tenants looking to reduce their environmental impact.
4. Retail: Adapting to the New Consumer Landscape
California’s retail sector has experienced significant shifts in recent years due to the rise of e-commerce, changing consumer preferences, and the fallout from the pandemic. While some traditional brick-and-mortar retailers continue to struggle, others are thriving by adapting to the new retail environment.
Experiential Retail and Omnichannel Strategies: Retailers that offer experiential shopping opportunities—such as interactive in-store experiences, entertainment, or dining—are performing better than those relying solely on product sales. Omnichannel strategies, which integrate online and in-store shopping, are also key to success in 2024, as retailers seek to provide seamless customer experiences.
Resurgence in High-Street Retail: Prime retail locations in high-traffic areas, such as Los Angeles’ Rodeo Drive or San Francisco’s Union Square, are seeing a resurgence in demand as tourism rebounds. Luxury brands, in particular, are capitalizing on this recovery, while smaller retailers in secondary markets face more challenges.
Retail-to-Industrial Conversions: Some underperforming retail properties, particularly suburban malls, are being repurposed for industrial use, such as fulfillment centers or logistics hubs. This trend reflects the ongoing demand for e-commerce-related infrastructure and the challenges facing traditional retail.
5. Multifamily: A Resilient Sector
California’s multifamily market remains resilient, driven by the state’s housing shortage and strong demand for rental properties. High home prices and rising mortgage rates have made renting the more viable option for many residents, especially in major cities and their surrounding suburbs.
Urban Multifamily Demand: Despite the exodus of some residents from urban areas during the pandemic, demand for multifamily housing in cities like San Francisco, Los Angeles, and San Diego has rebounded. Young professionals and families are returning to urban cores, attracted by job opportunities, amenities, and public transportation.
Rent Growth: With high demand and limited supply, rents have been rising steadily across the state, especially in coastal areas. Even with rent control laws in place, many landlords are able to increase rents due to strong tenant demand and low vacancy rates.
Affordable Housing Initiatives: The affordability crisis in California has led to an increase in government-led initiatives to promote affordable housing developments. In 2024, there is growing interest in public-private partnerships to create more affordable housing units, especially in high-cost regions.
6. Sustainability and ESG in Commercial Real Estate
Sustainability and environmental, social, and governance (ESG) factors are increasingly important in California’s commercial real estate market. In 2024, both investors and tenants are prioritizing properties that meet high sustainability standards and contribute to a reduced carbon footprint.
Green Building Standards: Commercial properties that meet LEED or other sustainability certifications are becoming more attractive to tenants, particularly large corporations with ESG commitments. These buildings often feature energy-efficient systems, sustainable materials, and reduced water consumption.
Investment in Renewable Energy: Many commercial buildings are incorporating renewable energy solutions, such as solar panels and energy storage systems, to reduce operational costs and environmental impact. This trend is particularly strong in industrial properties, where large roof spaces make solar installations practical.
Social Impact Investing: Investors are increasingly focusing on projects that have a positive social impact, such as affordable housing, community development, or projects that contribute to urban revitalization. This is particularly relevant in California, where housing inequality and homelessness are major social issues.
California CRE Market in 2024
The California commercial real estate market in 2024 is defined by both resilience and transformation. While challenges like rising interest rates, office vacancies, and housing shortages persist, there are also significant opportunities in sectors such as industrial, multifamily, and sustainable development.
Investors, developers, and tenants who stay attuned to these trends and adapt to the evolving landscape will be well-positioned to succeed. Whether capitalizing on the continued demand for logistics infrastructure or embracing the shift toward more sustainable and flexible spaces, those who take a proactive approach will find plenty of opportunities in California’s dynamic CRE market this year.
Specializing in Commercial Sales & Leasing,
Property Management and Multi-Family.
Website: www.dngcommercial.com
Email: deborah@rpmres.com | gulshen@rpmres.com
Call: 310.999.1203 | 562.225.9260
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