California Commercial Vacancy Rates Climb, Office Sector Faces Significant Headwinds

California's commercial real estate market is experiencing a notable increase in vacancy rates across various sectors, with office spaces particularly impacted. Data from late 2024 and early 2025 indicates a challenging environment, marked by an abundance of available properties. The overall U.S. commercial vacancy rate is reportedly at a nearly 40-year high, reflecting broader economic shifts.

In Southern California, commercial vacancy rates have been on an upward trend since 2023. By the fourth quarter of 2024, Orange County's office vacancy rate stood at 16.07%, while Los Angeles County's office market reported its eleventh consecutive quarter of negative net absorption, pushing its vacancy rate to 24.5% in Q1 2025. Downtown Los Angeles alone saw office vacancy rates exceeding 31%.

The industrial sector, while still robust, has also seen its vacancy rates rise as new construction catches up with demand. For instance, the Inland Empire's industrial vacancy rate reached 7.09% in Q4 2024, and Orange County's industrial vacancy climbed to 5.09%. Retail vacancy rates have remained relatively stable, though some areas like the Inland Empire experienced a rise to 5.9% by year-end 2024.

Experts attribute these trends to several factors, including the lasting impact of remote work on office demand, higher interest rates affecting investment and development, and a surge in new industrial construction. According to the Allen Matkins/UCLA Anderson Forecast, office developers anticipate a continued weakening of rental and occupancy rates, not expecting a full recovery before the end of 2026. This sentiment has led to a significant reduction in planned new office construction.

The prevalence of "For Lease" signs, as noted by Kevin Dalton on social media, reflects these underlying market dynamics. While the state's economy remains substantial, the commercial real estate sector is navigating a period of adjustment, with landlords increasingly offering concessions to attract tenants. The outlook for 2025 suggests a continued evolution, with some stabilization anticipated but significant challenges remaining, particularly in the office market.