60% of California CRE Executives More Optimistic on Development as Rate-Cut Expectations Ease Market Headwinds, Allen Matkins Survey Finds

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LOS ANGELES--(BUSINESS WIRE)--Feb 19, 2026--

The Winter 2026 Allen Matkins/UCLA Anderson Forecast California Commercial Real Estate Survey released today reveals California’s commercial real estate market is entering 2026 with measured optimism, as expectations for new development turn cautiously positive. The findings signal an inflection point in the market after several quarters of sustained caution driven by rising construction costs and interest rate uncertainty.

According to the latest survey results, more than half of California commercial real estate executives (51%) anticipate an increase in development activity over the next three years, up from 34% in the Summer 2025 Survey, while an additional 29% expect development levels to remain stable. Sentiment is further supported by improving monetary policy expectations, with 61% of respondents reporting increased optimism for development activity due to anticipated interest rate cuts.

Additionally, concerns around distress appear to be stabilizing statewide. More than two-thirds of respondents (68%) say distress levels have either remained consistent or have peaked and are beginning to decline, up from 58% in the prior survey, suggesting market participants are increasingly adapting to the current environment.

“After a long period of higher-for-longer interest rates and challenging financing conditions, we’re now entering the next phase of the investment cycle. Developers and investors are coming off the sidelines, adjusting to the new normal and beginning to reengage and deploy capital into compelling assets,” said Spencer Kallick, partner at Allen Matkins.

Office market reflects a two-speed recovery

The Winter 2026 Forecast highlights a divergence between Northern and Southern California office markets, as demand concentrates on high-quality, well-located assets.

In Northern California, office sentiment continues to improve. Seventy-five percent of respondents expect office demand to grow faster than supply, up from 61% in the Summer 2025 Survey, reflecting tightening conditions driven by renewed leasing activity. Expectations for declining vacancy rates have strengthened further, with 90% of respondents anticipating falling vacancies in San Francisco, up from 80% in the prior survey, and 80% in Silicon Valley, up from 65%. These shifts mark a significant inflection in market sentiment, particularly in Silicon Valley, driven by sustained AI- and technology-led demand.

“We're seeing investment interest picking up in office, not only from owner-users and private high-net-worth investors. We're also starting to see institutions coming back to office. Funds are being raised by institutions where fund managers are investing in office within their funds,” said Joon Choi, principal at Harbor Associates.

“Sentiment is generally optimistic in the office sector, but varies from asset to asset, depending on its classification. Here in the Bay Area, as well as in most gateway markets, class A, highly amenitized tier-one assets in prime locations are generally in a league of their own, commanding historically high rents and low vacancy rates,” said Nathaniel Touboul, a partner in Allen Matkins’ Real Estate Group.

Southern California is expected to experience a prolonged adjustment period, with 48% of respondents anticipating office demand and supply will remain in balance through 2029, indicating the market is still working through excess inventory. Approximately 68% do not expect Southern California’s office market to recover within the next three years, and development expectations remain muted, with just 3% anticipating more than one new office project in the coming year.

Retail sentiment improves statewide

Retail sentiment has strengthened across California, supported by improving inflation expectations and stabilizing fundamentals. Respondents are optimistic about rent growth, particularly in Southern California. Fifty percent of respondents believe Inland Empire rents will increase slower than or at the rate of inflation, up from 26% in the Summer survey, while similar improvements were recorded in Los Angeles (37%) and Orange County (39%).

Vacancy expectations have improved significantly statewide. Sixty-three percent of respondents expect retail vacancy rates to decline in Silicon Valley, up from 44% in the prior survey, while Los Angeles and Orange County saw increases to 68% and 60%, respectively, from 13% and 21%.

Investment priorities continue to favor neighborhood-serving retail, with 44% focusing on residential-serving formats and 28% prioritizing specialty retail within existing districts.

“One of the biggest retail trends we’re seeing is developers prioritizing traditional food operators, service providers and experiential uses. Brick-and-mortar retail still plays a role, but competition from e-commerce has made it increasingly difficult for traditional retailers to compete. As a result, developers are focused on creating destinations that draw people in, with service-oriented uses proving to be a stronger draw than conventional retail,” said Sandy Jacobson, a partner in Allen Matkins’ Real Estate Group.

Industrial shows renewed acceleration

The industrial sector is showing signs of renewed momentum heading into 2026. Expectations for development have increased, with 39% of respondents anticipating more than one new industrial project in the next 12 months, a 20% increase from the Summer 2025 Survey (19%).

E-commerce remains the primary driver of industrial development, cited by 45% of respondents, reinforcing its continued importance despite growing interest in AI-related infrastructure. Market sentiment in Northern California remains positive, with 58% of respondents expecting industrial demand to grow faster than supply.

“If we look at a 30,000-foot view of the overall industrial market for Southern California and the Inland Empire, 2025 was an active year. Rental rates have, for the most part, stabilized in the West. The East had a little bit of a dip in 2025. Hopefully, it will start stabilizing in 2026,” said Joey Reaume, executive vice president and principal at SRS Industrial.

“Tariffs affected the industrial market in the Inland Empire and across Southern California more than anything I’ve seen in my 20-plus years in the industry. This year, however, there is renewed optimism and a growing sense that the market is headed for a soft landing,” said Andrew Morrow, executive managing director at Cushman & Wakefield.

Multifamily remains a bright spot

Multifamily continues to stand out as one of the most resilient segments of California commercial real estate, even as sentiment moderates slightly heading into 2026.

In Northern California, rent growth expectations remain positive but have cooled from prior highs. In San Francisco, 36% of respondents expect rents to grow faster than inflation, down from 54% in the Summer 2025 Survey, while Silicon Valley saw a similar moderation to 31% from 43%. Southern California markets also reflect easing expectations, with slower rent growth anticipated in Los Angeles (40%, up from 25%) and Orange County (41%, up from 12.5%).

Development activity remains elevated relative to other asset classes, with approximately 64% of respondents planning new multifamily projects. Rental housing continues to dominate future development strategies, with 81% of respondents preferring rental units over condominiums.

Vacancy rates continue to improve statewide. In San Francisco, 79% of respondents expect vacancies to decline, while 50% anticipate declining vacancies in San Diego and 53% in Los Angeles, reflecting California’s constrained housing supply and sustained demand across primary and secondary markets.

“The Bay Area has continued to recover and is the best performing market across the West Coast and nationally. Both San Francisco and San Jose saw really strong rent growth in the spring and summer of 2025,” said Songyi Wang, director of investment at Greystar.

About the Survey

The Allen Matkins/UCLA Anderson Forecast California Commercial Real Estate Survey and Index polled a panel of California real estate professionals in the development and investment markets, on various aspects of the commercial real estate market. The survey is designed to capture incipient activity by commercial real estate developers. To achieve this goal, the panel looks at the markets three years in the future and building conditions over the three-year period. The survey was initiated by Allen Matkins and the UCLA Anderson Forecast in 2006, in furtherance of their interest in improving the quality of current information and forecasts of commercial real estate.

About Allen Matkins

Allen Matkins, a law firm with more than 270 attorneys, was founded with deep roots in real estate and has leveraged that foundation to grow and build prominent litigation, corporate, tax, labor and employment, land use and environmental practices allowing us to partner with clients across myriad industries and markets. For nearly 50 years, Allen Matkins has worked with clients drawn to us by our reputation for market leading solutions, pragmatism, exemplary quality, approachability and our unparalleled network of contacts and connections in business and government. For more information about Allen Matkins please visit www.allenmatkins.com.

About UCLA Anderson Forecast

UCLA Anderson Forecast is one of the most widely watched and often-cited economic outlooks for California and the nation and was unique in predicting both the seriousness of the early-1990s downturn in California and the strength of the state’s rebound since 1993. The Forecast was credited as the first major U.S. economic forecasting group to call the recession of 2001 and, in March 2020, it was the first to declare that the recession caused by the COVID-19 pandemic had already begun. uclaforecast.com

About UCLA Anderson School of Management

UCLA Anderson School of Management is among the leading business schools in the world, with faculty members globally renowned for their teaching excellence and research in advancing management thinking. Located in Los Angeles, gateway to the growing economies of Latin America and Asia and a city that personifies innovation in a diverse range of endeavors, UCLA Anderson’s MBA, Fully Employed MBA, Executive MBA, UCLA-NUS Executive MBA, Master of Financial Engineering, Master of Science in Business Analytics, doctoral and executive education programs embody the school’s Think in the Next ethos. Annually, some 1,800 students are trained to be global leaders seeking the business models and community solutions of tomorrow.
Follow us @uclaanderson

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SOURCE: Allen Matkins

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PUB: 02/19/2026 12:00 PM/DISC: 02/19/2026 12:00 PM

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