Over the last few years, in the wake of a series of unanticipated challenges ranging from unprecedented wildfires and supply chain issues to new workplace trends, commercial real estate companies have had to get creative. What changes and trends are here to stay for the long term? What legal, insurance and financial issues need to be addressed? What new roles is technology playing? What will the CRE industry look like a year from now?
We turned to three uniquely knowledgeable experts: Diane C. De Felice, Shareholder with Brownstein Hyatt Farber Schreck; Michael Lorch, SVP and Chief Lending Officer with Axos Commercial Bank; and Greg Skalaski, Executive Vice President – West Region with Shawmut Design and Construction, for their thoughts and insights about what’s next for Southern California’s resilient commercial real estate sector.
Q: How would you describe the overall outlook for Southern California commercial real estate as we head deeper into 2026?
LORCH: I’d describe the outlook as cautiously optimistic. The rate environment has put a lid on speculative activity, which is healthy for the market. We’re seeing more disciplined underwriting and more realistic pricing expectations from buyers and sellers alike. Industrial and multifamily fundamentals remain solid in most SoCal submarkets. Office is still working through structural headwinds, but pockets of genuine opportunity exist for well-located, amenity-rich assets. The biggest variable right now is rate trajectory. If the Fed delivers meaningful cuts in the back half of 2026, deal velocity will accelerate quickly. Sponsors and investors who stayed active through this muted cycle and maintained their lender relationships will be best positioned to move.
Q: What are some of the other key opportunities and risks for developers in 2026?
SKALASKI: Los Angeles has a unique opportunity to reverse the cycle of Downtown vacancy by reimagining obsolete office buildings as mixed-use and residential developments. With many commercial properties trading at significant discounts, adaptive reuse projects are becoming more financially viable than they have been in years. Realizing that opportunity will require continued partnership between the public and private sectors. Progress on permitting, code modernization, targeted incentives and investments that improve the Downtown experience can help unlock private capital and accelerate redevelopment. When the economics and regulatory environment align, developers can transform underutilized buildings into thriving communities that attract residents, businesses and activity back to the urban core. The result is a stronger Downtown, a healthier tax base and long-term value for the city and its residents.
Q: How are sustainability initiatives, energy efficiency standards and other environmental expectations influencing tenant demand and investment decisions in commercial real estate?
DE FELICE: Sustainability and energy efficiency are now core drivers of tenant demand and investment strategy portfolios in commercial real estate. Corporate occupiers prioritize ESG-aligned, high-performance buildings, often paying premiums for assets that deliver lower operating costs, healthier work environments and verified certifications like LEED or WELL. For investors, building operating systems focusing on carbon limits as part of ESG is central to underwriting, valuation and risk management. That ensures asset strength, which leads to stronger long-term rents, occupancy and resilience. As climate regulations tighten, sustainability is no longer a differentiator – it is the baseline, with inefficient buildings facing growing obsolescence and valuation risk.
Q: How are elevated interest rates and tighter lending conditions affecting commercial development, investment activity and deal-making in Southern California?
LORCH: Elevated rates have fundamentally reset the math on commercial real estate. Cap rates that made sense at 3% debt costs don’t pencil at 6-plus percent. We’ve seen significant compression in transaction volume as a result – buyers and sellers have been slow to bridge the bid-ask gap. On the lending side, banks broadly are more selective about asset class, sponsor quality and exit feasibility. At Axos, we’ve stayed active throughout the cycle because we underwrite to fundamentals, not momentum. The result of the broader environment is a slower market but a sounder one. The deals closing today genuinely pencil, and that’s a healthier market to lend into.
Q: Which commercial sectors (office, retail, industrial, multifamily, hospitality) are performing strongest, and which are facing the biggest challenges?
DE FELICE: The two sectors that are “neck and neck” performance-wise are industrial and multifamily. The industrial sector (which includes the logistics industry) is driven by demand, while the need for immediate units is driving structural housing undersupply. Following those two leaders is retail, which is stabilizing, particularly the necessity-based and experiential formats. With office, post-COVID recovery remains the most challenging issue, with hybrid work continuing to reshape demand. Even major tenants are rethinking footprint – KPMG recently cut space while upgrading by shrinking its footprint to a collaboration-focused office in Downtown L.A., reflecting this shift. Across all sectors, performance is less about asset type and more about quality, location and adaptability.
Q: What are businesses and investors looking for most from commercial properties today – flexibility, amenities, walkability, transit access, technology infrastructure or something else?
SKALASKI: It’s currently a buyer’s market in Los Angeles, so businesses looking for commercial space have a lot of choices at similar price points. They’re looking for not only the best deals but the best experiences for their employees – from amenities and technology to walkability and transit access. Amenities and flexible technology infrastructure specifically enable tenants to provide the best experience for employees, increasing the desire to be in-office. Century City and Culver City are examples of where this has been done right, attracting businesses and seeing results with some of the lowest commercial vacancy rates.
