REAL ESTATE NEWS

California's commercial real estate market is entering a period of measured stabilization as developers adjust to persistently higher interest rates.

The Summer 2026 Allen Matkins/UCLA Anderson Forecast Survey shows that although financing costs, construction expenses and broader economic uncertainty continue to limit new development, respondents remain confident in the long-term performance of needs-based sectors such as multifamily, industrial and neighborhood retail.

Market fundamentals are improving across much of the state, with industrial and multifamily leading the recovery.

The office sector, however, is experiencing a bifurcated trajectory, reflecting limited new supply and uneven demand patterns. Rather than signaling a broad rebound, respondents describe a more selective investment climate in which projects must clear higher underwriting thresholds to proceed.

This shift reflects evolving rate expectations. For example, in Winter 2026, most respondents anticipated rate cuts and were more optimistic about developments, but sentiment has since reversed. Now, 64% say the current rate environment makes them more cautious, compared with 61% who were previously encouraged by expected declines.

Overall, the survey portrays a market recalibrating to tighter financial conditions while maintaining confidence in sectors supported by structural demand. Developers appear focused on disciplined project selection, anticipating that long-term fundamentals will strengthen once capital markets stabilize.

Developers have accepted that interest rates will remain high for the foreseeable future, Spencer Kallick, partner at Allen Matkins, told GlobeSt.com.

"This acceptance leads to stabilization rather than full-fledged recovery," he said.

Retail Sector Shows Strength

Notably, Kallick noted he was surprised that the report showed so much strength in the retail sector.

"Because of the housing shortage, we expect multifamily sentiment to remain high," he said. Additionally, industrial is strong due to AI and e-commerce, but the percentage of developers planning new retail projects in Northern California jumped from 60% to 75%, according to Kallick.

"That's a pretty big jump," he added. "It indicates that developers have found something that is working for them, i.e., neighborhood-serving retail. That's the name of the game right now."

California's retail sector is increasingly intriguing as developers shift their focus toward centers that meet everyday consumer needs rather than pursuing traditional large-format retail.

Survey respondents are reporting a meaningful acceleration in appetite for starts, with 75% of Northern California and 61% of Southern California developers planning at least one new project in the next year, a notable increase from the prior survey.

This momentum is supported by expectations that demand will outpace supply, as 62% of Northern California respondents and 59% of Southern California respondents anticipate stronger retail demand ahead and nearly half of them identify neighborhood-serving retail as their preferred development focus.

Grocery-anchored centers, specialty retail and mixed-use projects continue to draw the strongest interest, reflecting evolving consumer preferences and sustained population growth across the state.

These formats offer stable foot traffic, resilient spending patterns and integration with residential and community uses, making them particularly attractive in a higher-rate environment.

Despite this growing activity, the outlook remains measured.

Forty-nine percent of respondents do not expect retail to enter a new growth cycle within the next three years, suggesting that developers are active yet disciplined, pursuing projects aligned with durable demand rather than speculative expansion.

Office Developers Still Don't Want to Build

Yet, the construction appetite is not created equally across the Golden State. Kallick found it interesting that confidence in the Northern California office market is very high, but that developers still don't want to break the ground on new office projects.

He asked rhetorically, "What needs to happen before a new wave of office development begins?"

Even though tech companies are competing for the best office space in San Francisco and Silicon Valley, that's not changing their minds about new construction now, he said.

"It leads me to believe that Downtown Los Angeles may take longer to fully recover because it does not have a major industry creating the same level of optimism seen in the Bay Area," Kallick said

Source: GlobeSt/ALM