Following the devastating fires that swept through Los Angeles in early January 2025, California’s real estate market faces challenges and opportunities. The Winter 2025 Allen Matkins/UCLA Anderson Forecast California Commercial Real Estate Survey, now in its 36th edition, reveals cautious optimism across most commercial real estate sectors. Multifamily housing leads the way and has promising development potential despite recent setbacks, according to this month’s live webinar by the two organizations featuring Sayantani Sayantani, staff economist of UCLA Anderson School of Management; Spencer Kallick, partner at Allen Matkins; and moderator Nick Trombola, the LA correspondent of Commercial Observer.
Post-Fire Rebuilding Efforts Shape Market Outlook
With at least 12,000 structures destroyed, an estimated 29 people killed, and thousands of households displaced, the fires have magnified California’s already critical housing shortage. The rebuilding process will significantly influence real estate development throughout the region in the coming years.
“The fires obviously had tremendous impact on our community, on our friends, and our colleagues, and clients,” said Kallick. “What this did is it just put even a larger focus in magnifying that need for housing.”
While rebuilding efforts are underway, Kallick cautions against expectations of rapid reconstruction. “I hate to burst the bubble, but that’s gonna take time. It’s probably gonna take more time than folks want it to take,” he explained, citing logistical challenges in areas with narrow streets and limited access.
Sayantani elaborated on government responses: “The governor has issued an executive order that creates by-right pathways for residents to return home and rebuild exactly what they had plus ten percent in the areas that are affected by fire by the fire, so in the Palisades and in Altadena.” Additionally, CEQA (California Environmental Quality Act) exemptions have been implemented to expedite rebuilding.
However, coordination among various government entities remains a significant challenge. “In order to help the people at the ground level who have lost their homes, who were the victims of this insane fire, I think all of them want to rebuild in a smooth manner, but that’s what’s going to be the challenge,” Sayantani noted. “You need coordination between the many different authorities who are supposed to help with the permitting, who are supposed to help with rebuilding.”
Housing Remains the Primary Opportunity
The survey shows notably positive sentiment toward multifamily development across all California regions. Developer sentiment indexes consistently exceed the 50-point mark, which indicates optimism.
“The number one phone call I get right now is, ‘Hey, how could we build housing on our property?'” said Kallick. “Whether it’s an existing piece of dirt, or it’s the kind of defunct office building or other existing property, asset class, everyone wants to build housing.”
Several factors drive this trend, including persistently high rents, strong demand, and recent state legislation aimed at reducing barriers to housing development. Kallick added, “We’re doing a tremendous amount of land use entitlements in the multifamily space, and I think that will only continue in the future.”
Sayantani provided data to support this positive outlook: “The developer sentiments have been very optimistic over the last few years and especially in the most recent survey. All of these are above 50, so we are almost completely optimistic about all the subregions of California regarding housing development sentiments.”
The rising costs of construction materials and labor present additional challenges, especially in the wake of the fires and new tariff policies. “The costs are gonna go up, it’s gonna take more time,” Kallick explained, noting potential labor shortages and logistical complications.
Changing Residential Design to Accommodate Remote Work
The survey highlighted how hybrid work models are influencing multifamily development. Developers are incorporating community-oriented features and in-home office spaces to meet evolving demands.
“We’re seeing it on the ground floor level,” Kallick explained. “Traditionally, there was requirement of mixed-use housing, ground floor retail, which frankly on most of my projects is a loss leader. But instead of having frankly vacant spaces, they are creating coworking spaces for their tenants, whether there’s some cool desks, some cool chairs, a little coffee bar, something that makes it interesting and inviting for people to work from home but also be social and around other people.”
Industrial Space Development Remains Strong
Industrial property development continues to be optimistic, particularly in the East Bay, Los Angeles, Orange County, and the Inland Empire. Only the Sacramento-San Joaquin Valley region showed declining sentiment.
“As we can see in East Bay, Los Angeles, Orange County, Inland Empire, the bars to the right most of each of these regions are above 50, which means there’s optimism in terms of industrial space development,” Sayantani explained, analyzing the survey data. “More projects are to be started in the Bay area, the expectation of demand over supply ratio is consistent in the Bay area, it’s higher in SoCal.”
Data centers have emerged as a primary driver alongside e-commerce facilities. “Data centers are probably the second highest call that I get,” noted Kallick. “All these different devices require data, and you don’t want to have latency.”
E-commerce continues to drive industrial demand as well. “I went online the other day and bought some socks because I was going to the East Coast, so winter socks, and they were at my door two hours later,” Kallick shared. “The way to do that, frankly, is you gotta have a lot of product nearby where people are living.”
Unlike traditional data centers located in remote areas, Kallick predicts more urban infill locations: “I’m actually working on a new skyscraper in downtown LA. It’s gonna be pure data centers.” He explained that proximity to data lines is crucial: “All the data lines from China to the West Coast pop up at the corner of Seventh and Grand, right in the heart of Downtown LA.”
Sayantani highlighted additional economic factors: “The internal rate of return threshold is expected to be lower than before relative to the older surveys, which means that more industrial development is going to be viable in the future.”
Retail Adapting to Experiential Demands
The retail sector demonstrates improving sentiment across most regions, with rising optimism especially evident in Southern California. Retail development increasingly emphasizes experiential offerings and neighborhood-serving concepts.
“People wanna go to a place where they can have a cup of coffee, have a great slice of pizza, go with their kids, have an ice cream, pick up a cool new shirt, a new pair of pants,” Kallick explained, highlighting the social aspects that e-commerce can’t fulfill.
The survey indicates expectations of lower investment return thresholds, suggesting more retail development may become financially viable. Sayantani elaborated: “In most of the regions, more recently for sure, there has been an uptick in the sentiments towards retail space building. There are expectations of lower internal rate of return thresholds in both markets, which is good news.”
Regarding regional variations, Sayantani noted: “In terms of rental rates, the Bay Area rental rates are expected to be higher everywhere. In SoCal, the rental rates are expected to be higher in Orange County and San Diego. They’re expected to be more or less steady in the Inland Empire and Los Angeles.”
Mixed-Use Development Challenges
While mixed-use developments are emerging across the state, Kallick highlighted practical limitations: “Mixed use is a great idea, and it’s a great planning goal. The challenge is mixed use doesn’t work everywhere. Just because you plan for it doesn’t mean that all of a sudden, there’s gonna be market demand there.”
He noted that successful mixed-use projects tend to be in walkable urban cores: “If you wanna go to kind of a cool coffee shop where you can also grab a breakfast burrito, or you wanna go to the niche men’s clothing store where you can find brands you can’t find everywhere else, that’s usually gonna be in close proximity to where a lot of folks live, that’s walkable.”
Office Market Shows Signs of Improvement
While office remains the weakest sector, the survey reveals improving sentiment. Northern California is experiencing an uptick in office demand, while Southern California markets remain mixed.
“Office has had a difficult path the last couple of years,” Kallick acknowledged. However, he noted a “flight to luxury, a flight to quality” with prime locations like Century City—”the hottest office sub-market in the United States right now”—performing well.
Sayantani provided detailed analysis of the survey findings: “There is an increase, especially in NorCal office development from winter of 2024 to winter of 2025. Even though we are not close to being back to where it used to be before the pandemic, it seems that people do want to come back, people do want to talk to other people in the office.”
The percentage of developers planning new office projects has increased, particularly in Northern California, though it remains well below pre-pandemic levels. “Office market sentiments are improving almost everywhere. The East Bay, Sacramento, and Inland Empire panels remain pessimistic, but they are improving. Los Angeles panel is nearing optimism,” Sayantani reported.
Kallick emphasized the social aspects driving office returns: “We’re social beings, and I think that will continue to grow. You’re starting to see large institutions, whether it’s JP Morgan or other entertainment companies saying, get your butt back to the office, and I think that that’s a trend.”
Looking Ahead: Condominium Development Gaining Interest
Looking ahead to 2025 and beyond, Kallick identified for-sale multifamily housing as an emerging trend. “It’s probably the third most popular question that I get from our clients right now,” he said regarding condominiums.
“People are rethinking how they live. What that looks like, what kind of amenities they want, is it walkable,” Kallick explained. “I think you’ll see more condo discussion, more townhouse discussion, and I think that will continue to grow in the year ahead.”
Sayantani emphasized the potential ripple effects of the fires: “While we will definitely see a lot of the effects in LA itself, we might also be seeing a change in demand for the type of housing and for the quantity of housing in areas close to LA, not necessarily only in LA. By next year around this time, we will be seeing a lot of the effects of the rebuilding, the recuperating from the fire, and I think the multifamily side of it will be changing significantly.”
Financing and Market Sentiment
The real estate sentiment has improved significantly in recent months, according to Kallick. “I travel a lot for our work, and I was back in New York, in Virginia and Maryland last week, meeting with clients, meeting with both developers and their capital, and whereas 60, 90 days ago when I was there, you know, Thanksgiving time, frankly folks were not as positive.”
He attributed the improved outlook to several factors: “Part of that is the election is done, part of that is that folks have moved around a lot, and they’re looking to hit their new promotes and be more active. There’s some kind of groupthink that hopefully leads to a lot of real estate activity.”
Regarding office loans coming due in 2026, Kallick noted that property owners are “trying to extend existing deals if they can, and then be looking for new clients or for new tenants.” He added, “I’ve seen kind of a shift even in the last 90 days or so with some of our traditional lenders getting off the sidelines and looking to office deals. The capital is out there, it’s more expensive for sure, but it’s definitely doable.”
Creative Construction Solutions
To address high construction costs, developers are exploring innovative approaches. “People who are moving quickly are able to kind of lock in prices before there’s a huge demand,” Kallick noted. “The other thing you’re seeing, which is super interesting, is around prefab construction. A lot of discussion about that, you basically kind of just show up and plop it down and connect up the utilities.”
Technological advances are also creating opportunities: “Even with 3D printing, you can get a really amazing house pretty affordably. That is a really interesting opportunity.”
Sayantani highlighted policy initiatives aimed at expediting construction: “The governor has mentioned that there’ll be CEQA exemptions. The CEQA certification takes a very long time to go through. So there will be CEQA exemptions for the rebuilding efforts in the Palisades and Altadena, and there are hints that there might be larger, more broad CEQA exemptions in other places in California too, just to help with the building effort in general.”
Conclusion: Cautious Optimism Amid Challenges
The pace and quality of fire recovery in California, particularly Southern California, will significantly impact market dynamics in the coming years. While optimism prevails across most commercial real estate sectors, rebuilding efforts face complex challenges related to permitting, insurance, financing, and coordination among government agencies.
“We can be optimistic about the rebuilding efforts for sure, but there’s a whole issue about understanding whether the Coastal Commission is in charge, whether the county is in charge, or whether the city is in charge,” Sayantani observed. “All of this will require a whole lot of coordination between the authorities, which is also very difficult to achieve.”
Despite these challenges, the survey indicates strong demand fundamentals, particularly in the housing and industrial sectors. Sentiment in retail is improving, and office markets are gradually recovering. As California moves forward, the real estate industry appears poised for growth, albeit with significant hurdles to overcome in the rebuilding process.
