Friday, July 31, 2026
California commercial real estate stabilizes as developers grow more selective, forecast finds
California commercial real estate is showing signs of recovery, but developers are becoming more cautious as higher interest rates and construction costs persist, according to a new UCLA Anderson and Allen Matkins forecast.
California's commercial real estate market is showing signs of stabilization, but developers are becoming more selective about new projects as they adapt to persistently high interest rates and elevated construction costs, according to a new forecast released Wednesday.
The Summer 2026 California Commercial Real Estate Survey by Allen Matkins and the UCLA Anderson Forecast found improving conditions in multifamily housing, industrial properties and neighborhood-serving retail centers, while the office market continues a gradual recovery driven by stronger leasing rather than new construction.
The survey found developers have become more cautious about launching projects. Nearly two-thirds of respondents, 64%, said the current interest rate environment has made them more cautious about pursuing new developments, reversing sentiment from the winter survey, when 61% expected anticipated rate cuts to improve development prospects.
"California's commercial real estate market hasn't stopped moving, but it has become much more selective," Allen Matkins partner Spencer Kallick said in a statement.
The report found California's housing shortage continues to support demand for multifamily development despite financing challenges.
About 75% of Northern California respondents and 64% of Southern California respondents expect apartment demand to outpace supply during the next three years. Developers also remain optimistic about rents, with 63% expecting Orange County apartment rents to grow faster than inflation and 58% predicting the same for San Diego.
Northern California developers appeared more aggressive than their Southern California counterparts, with 64% planning at least one new multifamily project over the next year, compared with 48% in Southern California.
Respondents said entitlement delays, construction costs, local fees and regulatory requirements remain the biggest obstacles to increasing housing production, despite strong market demand.
Retail also emerged as a favored investment sector, according to the survey, particularly grocery-anchored shopping centers and mixed-use developments serving daily consumer needs.
Seventy-five percent of Northern California respondents and 61% in Southern California said they plan at least one new retail project during the next 12 months, while about 60% expect retail demand to exceed supply. Nearly half identified neighborhood-serving retail as their preferred development focus.
Allen Matkins/UCLA Anderson said industrial real estate also remained one of the strongest sectors, although demand is becoming more diversified. While e-commerce continues to drive warehouse development, respondents increasingly cited logistics, advanced manufacturing, robotics and artificial intelligence infrastructure as growing sources of demand.
Nearly two-thirds of developers surveyed plan at least one new industrial project during the coming year despite expectations that construction costs will continue rising faster than inflation.
The office market showed continued improvement, particularly in San Diego, Orange County, San Francisco and Silicon Valley, as vacancy rates declined and leasing activity strengthened, the report found.
Even so, few developers are prepared to build new office projects. Ninety-two percent of Northern California respondents and 81% of Southern California respondents said they have no plans to begin office construction during the next 12 months.
The survey suggests office recovery will continue to rely on improving occupancy and tenant demand rather than significant new development, with respondents expecting a slow recovery over the next several years.
The Summer 2026 California Commercial Real Estate Survey by Allen Matkins and the UCLA Anderson Forecast found improving conditions in multifamily housing, industrial properties and neighborhood-serving retail centers, while the office market continues a gradual recovery driven by stronger leasing rather than new construction.
The survey found developers have become more cautious about launching projects. Nearly two-thirds of respondents, 64%, said the current interest rate environment has made them more cautious about pursuing new developments, reversing sentiment from the winter survey, when 61% expected anticipated rate cuts to improve development prospects.
"California's commercial real estate market hasn't stopped moving, but it has become much more selective," Allen Matkins partner Spencer Kallick said in a statement.
The report found California's housing shortage continues to support demand for multifamily development despite financing challenges.
About 75% of Northern California respondents and 64% of Southern California respondents expect apartment demand to outpace supply during the next three years. Developers also remain optimistic about rents, with 63% expecting Orange County apartment rents to grow faster than inflation and 58% predicting the same for San Diego.
Northern California developers appeared more aggressive than their Southern California counterparts, with 64% planning at least one new multifamily project over the next year, compared with 48% in Southern California.
Respondents said entitlement delays, construction costs, local fees and regulatory requirements remain the biggest obstacles to increasing housing production, despite strong market demand.
Retail also emerged as a favored investment sector, according to the survey, particularly grocery-anchored shopping centers and mixed-use developments serving daily consumer needs.
Seventy-five percent of Northern California respondents and 61% in Southern California said they plan at least one new retail project during the next 12 months, while about 60% expect retail demand to exceed supply. Nearly half identified neighborhood-serving retail as their preferred development focus.
Allen Matkins/UCLA Anderson said industrial real estate also remained one of the strongest sectors, although demand is becoming more diversified. While e-commerce continues to drive warehouse development, respondents increasingly cited logistics, advanced manufacturing, robotics and artificial intelligence infrastructure as growing sources of demand.
Nearly two-thirds of developers surveyed plan at least one new industrial project during the coming year despite expectations that construction costs will continue rising faster than inflation.
The office market showed continued improvement, particularly in San Diego, Orange County, San Francisco and Silicon Valley, as vacancy rates declined and leasing activity strengthened, the report found.
Even so, few developers are prepared to build new office projects. Ninety-two percent of Northern California respondents and 81% of Southern California respondents said they have no plans to begin office construction during the next 12 months.
The survey suggests office recovery will continue to rely on improving occupancy and tenant demand rather than significant new development, with respondents expecting a slow recovery over the next several years.
