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California’s commercial real estate market has reached a cautious balance as developers adjust to persistently high interest rates.

A recent industry survey reveals a stabilizing market rather than a booming one. Industrial and multifamily properties are driving the recovery, while the office sector shows uneven performance—strong demand in some areas, stagnation in others.

Developers adjust to a new financial reality

Expectations have changed significantly over the past year. In Winter 2026, most developers anticipated rate cuts and were more willing to proceed with projects. Now, 64% say current borrowing costs make them hesitant, compared to 61% who had been encouraged by the prospect of lower rates.

“Developers have accepted that interest rates will stay high for some time,” said Spencer Kallick, a partner at Allen Matkins. “This acceptance brings stability rather than a full rebound.”

The shift has led to stricter project evaluations. Developers now require stronger financial justifications for approvals, reflecting tighter capital conditions. Confidence persists, however, in sectors with steady demand.

Retail has emerged as a surprising bright spot. Kallick noted its strength in the survey, particularly in Northern California, where the share of developers planning new retail projects rose from 60% to 75%. “That’s a significant increase,” he said. “It shows developers have found a viable model in neighborhood-serving retail.”

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Retail gains momentum, but growth stays measured

Smaller, community-focused retail centers are changing development strategies. In Northern California, 75% of developers now have at least one new retail project planned for the next year. In Southern California, the number is 61%.

Grocery-anchored centers, specialty stores, and mixed-use developments are attracting the most interest. These formats provide reliable foot traffic and spending, making them appealing when financing is costly. Nearly half of respondents prioritized neighborhood-serving retail, reflecting consumer trends and population growth.

Optimism remains cautious. Forty-nine percent of developers don’t expect retail to enter a new growth phase within three years. The focus is on projects with clear demand rather than speculative ventures.

Restraint is even stronger in the office sector. Despite confidence in Northern California’s market, developers are hesitant to start new projects. Tech companies are competing for premium space in San Francisco and Silicon Valley, but this hasn’t spurred new construction.

Kallick explained that the path forward isn’t clear.

The market isn’t failing, but it isn’t rebounding quickly either. For now, developers are focusing on sectors that can endure higher costs—retail serving daily needs, industrial space linked to e-commerce and logistics, and multifamily housing in a state with persistent shortages.