Why California Is Gaining More Interest From Commercial Real Estate Investors

California has always been a magnet for big thinkers, but the current wave of commercial-real-estate (CRE) capital pouring into the state feels different. Yes, there are still eye-watering taxes and legendary red tape, yet office towers keep leasing, warehouses keep filling and apartment buildings rarely sit empty for long. So, what’s changed? Why are investors extra-willing to brave the Golden State’s hurdles right now? Let’s take a look at six forces that explain the momentum.

California’s tech economy is more than just Palo Alto these days. Now, San Diego is a global biotech node, Los Angeles is scaling AI, fintech and streaming, and Sacramento is quietly blossoming into an Ag-Tech hub.

Over US $80 billion in 2023 venture capital flowed to California companies - almost 50% of all U.S. VC funding. What does this mean? It means that start-ups that survive today become tomorrow’s commercial real estate anchor tenants for lab space, flex offices and data centers

Even after a bruising year of layoffs, the big names are still building: Google’s 1.1-million-sq-ft ‘Bay View’ campus opened in Mountain View and Apple is expanding in Sunnyvale. Physical space still matters when collaboration drives product cycles.

E-commerce growth may have cooled from pandemic peaks, but ‘need-it-tomorrow’ delivery promises aren’t going away. And because nearly a third of all U.S. containerised freight touches the Ports of Los Angeles and Long Beach, Southern California remains irreplaceable:

• 31% of America’s containerised trade moves through the two ports combined

• Inland Empire vacancy slipped to 7.4% in Q1 2025, reversing two years of increases

Every basis-point of vacancy filled translates into rising rents (Cushman & Wakefield pegs average asking rates at US$1.56 psf/month - triple 2015 levels). Institutional heavyweights such as Prologis (which bought a 14-million-square-foot portfolio from Blackstone for US$3.1 billion in 2023) are still on a land-grab, betting that reshoring and West-Coast-first inventory strategies will keep the spigot open.

Housing is California’s chronic headache - much like Texas which also boasts a strong housing and job market - and multifamily’s golden ticket.

• The statewide plan calls for 2.5 million new homes by 2030 - just to break even

• Median Los Angeles rent sits at US$2,695 (all unit sizes/as of April 2025)

• San Francisco Class A occupancy was 95.5% in Q1 2024 - even after 10,000 new units delivered in 18 months

Supply is finally arriving, but not fast enough. The result? Low delinquencies, quick lease-ups and durable revenue growth that REITs and pension funds crave. Suburban expansion corridors - Milpitas in Silicon Valley, Irvine in Orange County, East Bay transit nodes - are landing the most capital as renters hunt for space and slightly saner price tags.

Malls that relied on big-box apparel chains are still hurting, yet ‘eat-play-shop’ districts are thriving. The proof is in the rents:

• On Beverly Hills’ Rodeo Drive, average asking rent shot to US $1,100 per square foot in 2024, up 19% YoY and back above pre-COVID highs

• Statewide, tourism spending hit US $150.4 billion in 2023 - finally eclipsing the 2019 record

Developers are leaning into open-air village formats: think coffee roasters next to boutique gyms, patios that double as coworking and upper-floor apartments that guarantee foot traffic after 6 p.m. - it’s hard for a browser tab to replicate a sunset happy hour on Santa Monica’s Third Street Promenade.

California’s bureaucracy is notorious, but three recent shifts are material for CRE:

• Entitlement streamlining: SB 35 (2017) and SB 6 (2022) force localities to fast-track qualifying infill and mixed-income projects - cutting months off the permit queue

• Hard dollars for public works: The current five-year infrastructure plan budgets US $53.3 billion for roads, ports, courts, flood-control and broadband.​ Investors love smoother truck lanes and faster utility hook-ups

• Local incentives: Cities from Fresno to Long Beach are dangling tax abatements for adaptive-reuse - think micro-apartments in empty strip malls or life-science labs inside big-box carcasses

California’s 39-million-person economy just leap-frogged Japan: Nominal GDP hit US $4.1 trillion in 2024, making the state the world’s fourth-largest economy, behind only the U.S., China and Germany.

Scale matters. A bigger economic pie means:

• Deeper tenant rosters (from seed-stage start-ups to Fortune 50s)

• More lenders and debt-fund appetite (CMBS, life-co, green bonds)

• Transparent comps when it’s time to sell

Even in a higher-rate world, that kind of liquidity compresses cap rates faster than most secondary markets can dream about.

• Taxes & fees: At 13.3%, California’s top marginal income-tax rate is the highest in the country. CRE funds typically domicile deals in Delaware or Texas entities, using triple-net structures and cost-segregation studies to blunt the pain

• CEQA lawsuits: Environmental challenges can freeze a project for 18 months. Savvy sponsors set aside 2-3 % of TDC for litigation costs or partner with non-profits to qualify for streamlined review

• Homelessness & safety: Urban cores face reputational drag. Many Class-A towers now co-invest in private security and streetscape improvements via Community Benefit Districts (CBDs)

• Climate risk: Wildfire and flooding premiums are rising; lenders increasingly require resilience audits and PML (Probable Maximum Loss) modeling before closing

The same constraints that scare off casual capital - tight land supply, strict codes, activist neighbours - also erect moats around projects that do clear the hurdles. Layer on a tech engine that’s spinning up again - industrial demand welded to America’s busiest ports, a structural housing shortage and tourism-powered retail - and you get a convergence few other markets can match.

Yes, the state is expensive to enter and unforgiving if you mis-time the cycle. But CRE professionals who understand the permitting maze, hedge for climate risk and target sub-markets with job growth and transit access are seeing cap-rate premiums that outstrip even Texas and Florida deals - and they enjoy deeper exit liquidity when it’s time to sell.

In short: if you can stomach the bureaucracy and budget for the lawyer hours, California still offers up a blue-chip mix of scale, innovation and relentless demand. For many institutional investors, that’s worth every extra inch of paperwork.