The commercial real estate (CRE) market in Los Angeles and other U.S. gateway cities is showing renewed signs of hesitation as developers and investors recalibrate amid a backdrop of macroeconomic uncertainty. Industry professionals report that, while the sector is not in freefall, momentum has slowed noticeably in the third quarter of 2025, with many stakeholders holding back from launching speculative ground-up developments.
At the heart of the slowdown is uncertainty over interest rates. Despite some stabilization in inflation, questions remain about how aggressively the Federal Reserve will act in the coming months. The prospect of elevated borrowing costs has made financing new office towers, retail centers, and large-scale mixed-use projects increasingly difficult. Even well-capitalized firms are reconsidering timelines, preferring to preserve liquidity until economic conditions provide clearer signals.
Industry data and event calendars point to fewer groundbreaking ceremonies and major deal announcements compared with this time last year. While trophy assets in prime downtown corridors are still attracting tenant interest, leasing activity outside those areas is markedly weaker. Peripheral submarkets—particularly those dependent on commuter traffic—are experiencing slow absorption, leaving landlords with vacancies that are harder to fill.
To counter tepid demand, property owners are increasingly resorting to enhanced concessions. Local brokers note that rent abatements, tenant improvement allowances, and flexible lease terms are becoming more common as landlords look to maintain occupancy and prevent turnover. For tenants, this has created opportunities to negotiate more favorable terms, especially in secondary office districts and less established retail corridors.
The office sector remains particularly vulnerable. Hybrid work arrangements continue to dampen long-term leasing commitments, and while some companies are willing to sign short-term renewals, fewer are making the kind of multi-year commitments that underpin traditional office development. Developers who once envisioned large-scale office projects are now more inclined to pivot toward adaptive reuse, exploring conversions of outdated buildings into residential or flexible workspaces.
In the multifamily segment, caution also prevails. Rising construction costs and financing hurdles have slowed the pace of new apartment developments, even as demand for housing remains high. Some investors are identifying opportunities in repositioning older buildings, dividing them into smaller, more affordable units that cater to shifting demographics, including students, young professionals, and retirees seeking urban living. Yet, industry insiders caution that such projects take time to entitle and execute, and lenders remain selective in underwriting.
Capital deployment across the CRE spectrum is sluggish. Private equity funds and institutional investors have capital ready but are reluctant to commit in a volatile environment. Many are waiting for clarity from the Federal Reserve’s next policy decisions and are tracking inflation trends closely, as both factors will directly influence debt costs and asset pricing. Without that clarity, investors fear overpaying in a market where values could still reset lower.
Despite these headwinds, there are areas of resilience. Industrial properties—particularly logistics and warehousing—remain attractive, driven by steady e-commerce demand and regional distribution needs. Similarly, well-located retail with strong experiential components continues to outperform, especially in neighborhoods with robust foot traffic and tourism activity. These bright spots, however, are not strong enough to offset the broader cooling seen in office and mixed-use projects.
Market analysts suggest that the sector is in a holding pattern rather than a full downturn. The fundamentals of key coastal markets like Los Angeles remain strong, with global capital still interested in iconic properties and strategic locations. However, the gap between buyer and seller expectations continues to slow deal velocity, as participants wait for economic signals that could bring valuations into clearer alignment.
For now, the CRE landscape in Los Angeles and other gateway cities is defined by cautious optimism tempered with restraint. Developers, investors, and brokers are adjusting strategies, emphasizing flexibility while waiting for conditions that justify bolder commitments. In the coming months, much will hinge on whether the Federal Reserve can strike a balance between curbing inflation and creating a financial environment conducive to long-term investment.
