California Real Estate Confidence Builds: Allen Matkins/UCLA Survey

Dozens of commercial real estate professionals are largely optimistic about the future of the industry in California, despite persistent challenges such as the relentless housing crisis, construction costs and labor, and financial distress.

That’s according to the new winter 2025 Allen Matkins/UCLA Anderson Forecast Commercial Real Estate Survey. The biannual survey collected responses from 92 investors, developers and brokers across both private and public firms in the Golden State to get their view on the state’s development and investment environment in the next three years. 

The survey focuses on the four main asset classes — multifamily, industrial, office and retail — across eight submarkets: Los Angeles, Orange County, the Inland Empire, San Diego, San Francisco, East Bay, Silicon Valley and Sacramento/San Joaquin. The survey was conducted just after the 2024 presidential election but before the L.A. fires began in January (which as of Feb. 11 killed 29 people and damaged or destroyed over 16,000 structures across L.A. County).

Compared to the 2024 summer survey, the current general mood was more positive for the multifamily, industrial and retail sectors, largely due to the changing political climate, alongside more relaxed financial requirements and investment thresholds. Sentiment toward the struggling office market improved but was still muted.

Spencer Kallick, partner at law firm Allen Matkins, and Sayantani, a staff economist for the UCLA Anderson School of Management, agreed the results of the survey, particularly for Southern California, seem to confirm recent trends.

“As a whole, I’d say that office sentiments are improving,” Sayantani told Commercial Observer. “It’s still not completely bad, but it’s improving. And multifamily and retail are still holding as strong as they have been over the last few years.”

The outlook for the state’s multifamily was the strongest among the four sectors, with bullish sentiments recorded across all eight submarkets, particularly in Orange County, San Diego and East Bay. Demand for housing in California is perpetually growing much faster than supply can keep up, according to the report, and that naturally produces tailwinds for vacancy rates and rent prices. 

More relaxed regulations from the state and cities in response to that demand also positively affect project approvals; 74 percent of the survey’s respondents said they planned to start new multifamily developments within the next 12 months — up from 53 percent in the summer 2024 survey — with 60 percent of respondents saying they planned more than one project. 

“One of the things that I find most interesting is the continued, almost insatiable desire to buy and develop multifamily,, and that’s not surprising,” Kallick said in a separate interview. “In California, we have a huge deficit of multifamily housing, and so it makes sense, and I’m of the opinion that you probably can’t build enough multifamily to get us out of that hole.”

About 61 percent of respondents said they expected higher equity requirements for multifamily projects, with 51 percent expecting higher internal rate of return (IRR) thresholds, owing to generally higher production costs. In the 2024 survey, 61 percent expected higher IRR thresholds. 

Outlook for California’s retail sector is also more positive compared with previous surveys, and sentiment was optimistic for six out of the eight markets (results for San Francisco and Sacramento/San Joaquin were slightly below the survey’s optimism threshold). There are more development projects planned for both Southern and Northern California this year compared to 2024, and generally positive views about rental rates, though opinions on vacancy over the next three years across the regions are mixed.

Optimism about the state’s industrial markets also improved. Only five markets were surveyed for the asset class — L.A., Orange County, Inland Empire, East Bay and Sacramento/San Joaquin — and opinions on four out of five (other than Sacramento/San Joaquin) were optimistic. That includes L.A. and the Inland Empire, which for the past several years have seen negative outlooks due to climbing vacancy and availability, alongside tumbling rental rates after wickedly high supply deliveries and interest rates post-2022. 

Most survey participants believe demand in both Northern and Southern Californian markets will outpace supply between now and 2028, largely due to growing interest in data center facilities. Fifty-six percent of developers reported having started more projects within the past year in Northern California compared to previous surveys, with 69 percent saying that they had plans to start projects over the next year. Thirty-eight percent of participants said that data centers and digital infrastructure were the principal catalysts for development in the state, more than double the 17 percent who said the same thing in the previous survey.

Results for Southern California were more mixed. Sixty-one percent said they had started projects within the past year, an improvement over the summer survey, though just 38 percent said they had plans for new development within the next 12 months, compared with 44 percent in the previous survey. 

“I think that there has been a reset in terms of the capital markets, post-election and in the new year, where folks are getting more realistic about what it takes to get a deal done, especially an industrial deal,” Kallick said. “It sounds crazy, but there is a shortage of supply in some areas. And so good projects that make sense, that are well located, are helpful. And there’s been state laws that have made it more challenging to build industrial, and so that’s put up a barrier to entry, which makes new projects more sought after.”

And then there’s office, California’s problem child.

Sentiment for the sector is steadily improving compared with recent surveys — including in L.A., which has mostly faced dismal office news for nearly five straight years — although those polled remain pessimistic in the Inland Empire, East Bay, and Sacramento/San Joaquin. Three-year outlooks for both rent prices and vacancy rates are improving across the board in Southern California, though optimism is more muted in Northern California, likely due at least in part to the amount of new projects underway in the region. Just 4 percent of respondents said that they had begun a new office development within the next year in the Bay Area, compared with 5 percent in the summer 2024 survey. 

Office development in Southern California, meanwhile, has picked up relative to previous years, with 14 percent of respondents saying that they planned new office projects within the next 12 months, compared with 9 percent in summer 2024. 

“There was a question in the survey that asked which market trends have impacted your business most in 2024, and a lot of the responses have to do with work from home,” Sayantani said. “So I think there is a substantial amount of confusion about exactly whether we are returning completely back to office work, like we were before 2020, or not. But I think that’s a big factor, that there are a lot of pushes to go back to the office, if not full time, then at least for some amount of time. 

“There’s a huge uptake in hybrid work,” she added ”Places that have gone completely remote over the pandemic are going back for a little bit of the time in the week to the office. So I think that’s where it’s coming from. There are also a lot of changes happening in the type of offices being built. So maybe demand for the office sector is looking up because people want to go back to the office with certain changes in mind.”

Both Kallick and Sayantani agreed that it was too early to say exactly how the L.A. wildfires would impact the outlook across Southern California’s asset classes. But the experts predict the effects on the housing market could be significant.

“My concern is that even the most aggressive reports are [saying] that it’s going to take several years to get new housing built [in the areas affected by the fires],” Kallick said. “It just takes a long time in California to get things built. So how do we reduce some of those barriers? I think that lots of folks, myself included, have lots of ideas about how to do that. But — I’m trying to be optimistic, but also realistic — we have a huge [housing] deficit, and this just makes it grow even larger.”

“I think [the impact of the fires] is going to change quite a bit for the Los Angeles sector and, through migration, maybe some of the other SoCal regions as well,” Sayantani said. “I’m guessing there’s going to be a lot of discretion by the homeowners as to whether they want to stay, they want to rebuild the houses exactly the way they were, or they want to migrate to some other region, or they want to rebuild the homes in a completely different way. And based on that, there will be a lot of reactions from the industries around them, the retail around them, the office around them, and so on.”

Nick Trombola can be reached at ntrombola@commercialobserver.com.