Developers Recalibrate in California as Costs Rise and Market Conditions Shift
California’s commercial real estate landscape is undergoing a strategic reset as developers confront rising construction costs and an unpredictable economic environment. A recent joint report from Allen Matkins and UCLA reveals that more than a third of developers statewide have either paused or canceled upcoming projects—an early indicator of how market fundamentals are reshaping priorities.
Focus Shifts to High-Demand Sectors
Rather than spreading risk across all asset types, many firms are doubling down on areas where demand remains resilient. Industrial and multi-family developments continue to attract the most attention, buoyed by favorable supply-demand dynamics and long-term growth drivers.
Multi-family, in particular, stands out. Two-thirds of surveyed respondents are planning new residential projects—marking the highest level of activity since 2022. Developers are especially focused on rental properties with built-in amenities tailored for remote work, a trend that continues to drive tenant demand.
“We’re seeing a resurgence in multi-family interest, even with elevated costs,” said Heather Riley, partner at Allen Matkins. “Well-located, amenitized rental housing is still in short supply across much of the state.”
Industrial Remains a Safe Bet
The industrial sector shows no signs of slowing. Demand for distribution and logistics space—fueled by the continued strength of e-commerce—is still outpacing supply in both Northern and Southern California. Developers are even evaluating conversions of outdated office properties into industrial assets, signaling confidence in the long-term viability of this sector.
Vacancy rates are expected to remain low, and developers appear willing to navigate cost pressures to bring new industrial projects to market.
Office and Retail Face a Tougher Road
By contrast, office and retail projects are seeing slower momentum. Sentiment among office developers remains soft—only 16% in Southern California and 17% in Northern California are planning new builds. While some optimism is emerging, particularly around long-term recovery, most see meaningful improvement still several years away.
“Office developers are cautiously optimistic, but we’re not out of the woods yet,” noted Julie Hoffman, partner at Allen Matkins. “It’s a gradual shift, not a sharp rebound.”
Retail presents a mixed picture. While traditional big-box formats decline, a subset of developers is optimistic about growth in mixed-use and specialty retail. Around 38% of respondents anticipate a new cycle of retail development within three years, though expansion is expected to be targeted rather than widespread.
Developers and Investors Take Stock
The survey polled 140 firms across California—80 in the south and 60 in the north. Nearly half of participants identified as value-oriented investors, with most of the remainder active in development.
As uncertainty around tariffs, inflation, and financing persists, many in the industry are returning to fundamentals: focusing on sectors with clear demand and carefully evaluating where to commit capital.
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