The California commercial real estate market is difficult to gauge because it is, really, several real estate markets in one state. Even within the typical categories of Northern California and Southern California, there exist various, and sometimes radically divergent markets. The California markets could probably be dissected in infinite ways, but in this report, we'll refer to the San Diego market, the Los Angeles Market, and the Bay Area market. As well, we will look at the markets off the famed California coast, like those in Riverside or Sacramento.


The San Diego commercial real estate market remains strong, and the San Diego downtown area, led by the Gaslamp District, is experiencing a rebirth. Indeed, the market is so strong, and saturated, that investors are looking outside the San Diego area until things loosen up a bit. Experts are giving the following advice to those interested in investing in San Diego: if you can buy and hold for a long time, buy something if you can find it, if you're looking to add value to a property and flip it, look elsewhere. To the south of San Diego, in Otay Mesa, there is still vacant land to be developed relatively inexpensively. Otay Mesa is one of three U.S.-Mexico border crossings in San Diego County.

Orange and Los Angeles counties were bracing themselves for a slowdown in the industrial markets as industrial real estate usually follows the housing market, and the housing market in these counties is experiencing a severe slowdown. However, industrial property investors are having a better than expected year so far. Indeed, all sectors of commercial real estate are doing quite well, seeing record rents and sales prices. Retail and office vacancies are below 10%, and new construction commercial permits are up in the first few quarters of 2007. The one dark cloud on the horizon is a potential glut of office space due to industrial conversions as old, light manufacturing companies move out of the area.

The Bay Area market is always a world unto itself. The commercial market remains steady, with high prices and rents, high saturation and low turnover. Residential investors will have a tough time in the market though, as only the high-end market - homes starting at $750,000 - is unaffected by the current slowdown. Otherwise, residential developers or investors will have a hard time finding a buyer as buyers are sitting out of the market waiting for prices to drop, even though, paradoxically, they aren't.

Inland, California's economy remains strong, so its real estate market does too. In the inland areas, there is still room and demand for affordable new development as people from California move off the high-priced coasts and people moving into California stop short of the coasts. Additionally, many of the larger metro areas are experiencing first-time growth or revival of their city centers. Riverside, San Bernardino, Bakersfield, Sacramento, Indio and El Centro are all seeking investment in their "downtown" areas. Particularly hot are the areas that used to be heavily agricultural and are newly urbanized such as Indio, El Centro and Bakersfield. As well, these area may support some limited new residential construction. The state capital and its surrounding towns may be a great place for investors in existing residences. Over twenty percent of the homes in Sacramento County are worth less than their mortgages, and the county ranks in the top ten, nationally, for foreclosures.

Having said all that, there is one thing worth noting that seems to hold constant across all California markets: many experienced investors, professional and the average homeowner alike, are getting out of California all together. It's not so much that investors are fleeing the California markets, but rather that it is so costly to enter or make any money in the markets that investors with less than enormous quantities of time or money are looking elsewhere. Large investors like REITs, hedge funds, pension funds or large commercial real estate services firms like CB Richard Ellis or Grubb and Ellis do best in these markets.