The Summer 2026 Allen Matkins/UCLA Anderson Forecast California Commercial Real Estate Survey finds that California’s commercial real estate market is stabilizing as developers adjust to a longer-term higher-rate environment.
Financing costs, construction expenses and economic uncertainty continue to limit new projects. Still, survey respondents express optimism about the long-term prospects for needs-based sectors such as multifamily housing, industrial space and neighborhood-serving retail.
Market fundamentals are improving across much of the state, especially in industrial and multifamily. Office properties are seeing a more uneven recovery after years of limited new construction. Rather than a broad rebound, respondents describe a selective investment climate in which projects must clear higher underwriting standards.
Interest rate expectations drive much of the caution. In the Winter 2026 survey, 61 percent of respondents said expected rate cuts made them more optimistic about development. That sentiment has reversed. Now 64 percent say the current rate environment has made them more cautious about launching new projects.
“California’s commercial real estate market hasn’t stopped moving, but it has become much more selective,” said Spencer B. Kallick, partner at Allen Matkins. “With developers now assuming that higher rates are here to stay, it’s fundamentally changing how projects are evaluated. Those who remain disciplined about where they deploy capital, focusing on sectors with durable demand and underwriting conservatively, will be best positioned to capitalize on the next phase of the market.”
Housing shortage fuels multifamily interest
California’s ongoing housing shortage continues to draw capital into multifamily development. Seventy-five percent of Northern California respondents and 64 percent of Southern California respondents expect multifamily demand to outpace supply over the next three years.
Momentum is strongest in Northern California, where 64 percent of respondents plan at least one new multifamily project in the next 12 months, compared with 48 percent in Southern California. Respondents also anticipate resilient rents, with 63 percent expecting Orange County rents to outpace inflation and 58 percent expecting the same in San Diego.
Despite solid demand, developers still face significant barriers beyond market fundamentals, including entitlement delays, high construction costs, local fees and regulatory hurdles.
“In 2026, we’re seeing a mixed outlook. In the Bay Area. Rents are increasing coupled with job creation through AI, but it’s still challenging for ground-up development because we’re not sure where the interest rates will go in 2026, which also has an effect on treasury borrowing rates,” said Michael Van Every, President and Managing Partner at Republic Urban Properties.
Neighborhood retail gains traction
Retail developers are shifting focus toward centers that serve everyday needs rather than traditional large-format retail. Development plans are rising, with 75 percent of Northern California respondents and 61 percent of Southern California respondents planning at least one new retail project in the next 12 months. That compares with 60 percent and 45 percent in the previous survey.
Sixty-two percent of Northern California respondents and 59 percent of Southern California respondents expect retail demand to exceed supply. Forty-six percent identified neighborhood-serving retail as their preferred development focus. Grocery-anchored centers, specialty retail and mixed-use projects are attracting the strongest interest.
Nearly half of respondents, 49 percent, do not expect retail to enter a new growth cycle within the next three years.
“Developers are recognizing that diversity in retail centers is the driver today. People want to go to one retail center to work out, eat, buy their groceries, and get a coffee. Service-oriented businesses complement your standard grocery-anchored centers,” said Sandy Jacobson, Partner at Allen Matkins.
Industrial demand diversifies
The industrial sector continues to benefit from broad demand. While 32 percent of respondents still cite e-commerce as the primary driver, that figure is down from 45 percent in the Winter 2026 survey. Developers increasingly point to logistics, advanced manufacturing, robotics and AI-related digital infrastructure as sources of future growth.
Sixty-three percent of Northern California respondents and 59 percent of Southern California respondents plan at least one new industrial project over the next 12 months. At the same time, 82 percent expect construction costs to rise faster than inflation over the next three years.
Office recovery advances without new supply
Office fundamentals are strengthening in key markets including San Francisco, Silicon Valley, Orange County and San Diego. Leasing activity, occupancy and rental expectations have improved. Yet developers remain cautious about adding new space. Ninety-two percent of Northern California respondents and 81 percent of Southern California respondents report no plans to start a new office project in the next year.
The sector appears to be recovering through stronger existing demand rather than new construction. Vacancy expectations have improved across Orange County, San Diego, Silicon Valley, San Francisco and the East Bay. Southern California respondents still do not anticipate a new office development cycle within the next three years.
“In San Francisco, the speed at which AI companies need office space is creating a game of musical chairs. For many years, the music was playing and tenants could circle a space and maybe see it a couple of times, but now the music has stopped, and there is more demand than move-in ready space available,” said Nate Touboul, Partner at Allen Matkins.
Overall, the survey portrays a market that rewards discipline. Capital is flowing toward sectors with clear, lasting demand while developers apply tighter standards in a higher-rate environment that shows little sign of easing soon.