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2/18/25
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The Winter 2025 Allen Matkins/UCLA Anderson Forecast California Commercial Real Estate Survey just released indicates a significant shift in the industrial development landscape, with data centers and digital infrastructure now leading the charge, outpacing e-commerce as the primary driver of new industrial projects. According to the latest survey, 38% of respondents cite data centers and digital infrastructure as the foremost catalyst for development, a marked increase from 17% in the previous survey.
The Forecast also points to shifts in the office market driven by AI and digital infrastructure, particularly in key tech hubs such as San Francisco and Silicon Valley. The growing demand for AI talent has fueled an uptick in office leasing, leading to the first drop in office vacancies in San Francisco since 2019, according to CBRE. AI job growth in the region has increased by 59% since January 2024, contributing to this shift.
“The growing adoption of cloud computing, machine learning, and artificial intelligence is influencing commercial real estate,” said Spencer Kallick, partner at Allen Matkins. “As technology continues to shape the sector, real estate developers and investors are taking a close look at which markets are positioned for growth across the office, industrial, retail, and multifamily sectors.”
Digital economy powers industrial development
With a heightened emphasis on data centers and digital infrastructure, e-commerce is now the secondary driver of industrial development at 28%, a notable decline from 50% in the previous survey.
Amid this shift, outlook on the industrial sector is strong, particularly in Northern California, where half of respondents (50%) expect multiple new projects within the next 12 months. Southern California mirrors this optimism, with 54% anticipating a surge in new projects. Despite rising construction costs, the sector’s resilience demonstrates a robust future driven by the demand for technological infrastructure.
"The industrial market is accelerating with the development pipeline growing daily to support the increasing prominence of digital infrastructure, as well as the continued need for last-mile delivery centers,” said Jonathan Shardlow, partner, Allen Matkins.
Inflation and rising costs won’t slow multifamily momentum
Despite inflationary pressures and rising construction costs, the multifamily market remains resilient. Vacancy rates across California are improving, particularly in major urban centers. Respondents predict vacancy declines in key tech centers including San Francisco (58%), San Diego (67%) and Los Angeles (57%), which are benefiting from increased housing demand driven by AI job growth.
"Increasing demand for multifamily housing is closely tied to the ongoing housing shortage in California, complemented by strong job growth in the AI sector," said Jennifer Jeffers, partner, Allen Matkins. "As technology companies ramp up hiring, there is greater need for housing solutions to accommodate both a growing workforce and residents seeking flexible living arrangements."
In the wake of the recent wildfires impacting Southern California, future multifamily development is likely to increase further as displaced homeowners seek temporary apartment housing. This surge in demand is projected to increase Los Angeles-area rent prices as well, with CoStar data anticipating a rise by 8-12%.
For new multifamily development projects, hybrid work models remain a primary influence in design, with 64% of respondents citing community-oriented features as a top design element, followed by 55% focusing on in-home office and coworking spaces. The demand for connected living spaces is also rising, with a third of developers (33%) prioritizing proptech to meet the needs of modern renters.
Office changes shape
The office market is undergoing significant transformation, particularly in Northern California, where 67% of respondents expect demand to outpace supply. In San Francisco and Silicon Valley, 70% and 60% of respondents, respectively, anticipate a decline in vacancy rates, signaling a recovery in leasing activity.
"While Northern California’s office markets are experiencing strong leasing activity, Southern California presents a more mixed picture," said Alain R’bibo, partner, Allen Matkins. "Demand for smaller office footprints and flexible spaces is growing as hybrid and remote work models persist. This trend continues to put pressure on traditional office space operators to rethink their offerings and embrace more adaptable designs."
New office development remains limited, with only 4% of Northern California respondents and 5% of Southern California respondents expecting new office projects this year. As a result, the focus is likely to shift to the viability of retrofitting older office spaces to meet the needs of a more digital and modern workforce in areas such as high-speed connectivity, energy efficiency and accessibility.
Retail blends in
Retail development is increasingly blending with residential and commercial footprints, driven by consumer demand for convenience and a broader range of experiences. The Forecast reveals that residential-serving retail is the primary driver of new retail development, accounting for more than half (53%) of responses, as more mixed-use environments emerge.
"Retail is becoming less about traditional shopping and more about creating vibrant, experience-driven spaces," said Sandra Jacobson, partner, Allen Matkins. "We’re seeing a greater focus on spaces that integrate retail with residential areas, offering consumers a one-stop destination for living, working and leisure supported by technology to enhance the experience."
While e-commerce continues to pressure traditional retail spaces like malls and big-box stores, 18% of respondents see demand for experiential spaces as a way to drive foot traffic and enhance the in-person shopping experience. Vacancy rates in San Francisco are expected to either decrease or remain stable, while Los Angeles is seeing consistent demand for retail spaces, despite ongoing challenges from e-commerce growth.
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.
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