California Commercial Real Estate Faces Reckoning as Market Forces Converge

Written by:

Steve Marcinuk

Date:

17 Sep 2025

Share

Share via Facebook

Share via Linkedin

Share via X

Copy to clipboard

The California commercial real estate market is experiencing a fundamental shift as economic pressures converge to create significant challenges and emerging opportunities. After years of low interest rates and inflated property values, the market is now reassessing investment strategies and asset values.

Daria Walker, Principal at Walker Realty Capital, has witnessed this transformation firsthand. Based in Los Angeles, Walker specializes in deals from $2 million to $10 million across office, industrial, retail, multifamily, and owner-occupied properties.

“I think we’re at the beginning of it,” Walker explains when discussing the current market cycle. “We’ve sort of normalized this boom and bust cycle in our economy, and we just came out of a bust. After any great fire, it creates fertilizer, and you see new growth.”

The Market Reality Behind the Headlines

While headlines focus on California’s challenges, Walker notes that increased market activity isn’t necessarily a sign of recovery, but often the result of forced transactions and generational wealth transfers.

“A lot of the owner operators that were holding on to their loans or had gotten over leveraged are losing their properties,” she observes. “That’s creating opportunity for investors that were more conservative during the last cycle.”

Key drivers include baby boomers conducting end-of-life planning, selling properties or facing foreclosure, and properties purchased at market peaks now under financial stress.

“If you bought at high leverage with these extremely low interest rates, thinking that these three and four percent cap rates were going to hold in California, you’re probably going to take the loss and write it down, or pay down your loan,” Walker explains. “If you refuse to do either, you’re going to lose it.”

Refinancing Pressures Drive Activity

Much current market activity stems from refinancing pressures. Walker reports increased refinancing as borrowers who waited out adjustable rate periods can no longer meet debt service covenants.

“Lenders are saying you need to refinance now or we’re going to put you in default,” she notes. “That’s been driving a lot of the refinance business.”

Some borrowers are finding opportunities. Walker recently completed an $18 million multifamily package in the Bay Area for borrowers who maintained conservative leverage. These properties, originally financed at 50-65% loan-to-value ratios, benefited from rent growth after tenant turnover.

“California is rent controlled, so you lose your $1,800 a month tenant that’s been there for 11 years, suddenly you’re getting $3,500 for that unit,” Walker explains. “They’re realizing that rent growth, and it’s enabling them to get a lot more proceeds than they would have otherwise.”

Cap Rate Compression Reverses

The correction has brought significant changes to valuations. Where investors previously accepted 3-4% cap rates, current transactions show 6% for stabilized properties, with distressed assets at 8% or higher.

“Properties are honestly a lot cheaper than they were, and that’s related to the low transaction volume we experienced in the last two years,” Walker notes. “California is on sale.”

This repricing extends beyond traditional sectors. Walker points to challenges in wine country, where vineyards face pressures including fire damage, changing consumer preferences, and tariffs.

“We’re getting decimated in wine country,” she explains. “You’re seeing vineyards go on sale, declining revenue across the board. Our most valuable assets in California are in trouble.”

Natural Disasters Compound Challenges

Recent wildfires have added another layer of complexity. Walker experienced this when closing a deal in Cottonwood, where insurance premiums reached nearly $30,000 for a just-over-$1 million property.

“That’s going to become more and more normal,” she warns, describing clients forced to sell due to doubled interest rates, tripled insurance premiums, and mandatory seismic retrofitting.

The recent fires in Palisades and Altadena present particularly complex rebuilding challenges. “We’re not just talking about structural damage where you bulldoze and put up a new building,” Walker explains. “Infrastructure melted into the ground – sewer systems melted. We’re having to dig down and completely redo infrastructure.”

The rebuilding process will be expensive and time-consuming, with owners bearing much of the cost, though Proposition 13 provides some protection against dramatic property tax increases.

Winners and Losers in the New Environment

The current environment creates clear lines between those positioned to capitalize and those facing distress. Family offices and private equity are well-positioned to acquire distressed assets, often before individual investors can compete.

“If you have been sitting on some capital for a long time and you’re thinking about getting into the market, you need to move now,” Walker advises. “Do not wait for rates to come down or for prices to come down, because if there’s any movement, these things will be swept up in mass.”

Walker sees a concerning trend in the so-called “great wealth transfer,” the anticipated passing of assets from baby boomers to younger generations. She believes the narrative masks a different reality.

“You’re going to see a lot of people that were just getting by managing their small portfolios lose a lot of their assets, and it will be picked up by much larger investors,” she explains. “You will see the great wealth transfer actually happen in the opposite direction than what we were expecting.”

Looking Forward

Despite the challenges, Walker sees opportunities for well-positioned investors and professionals. Transaction volume is increasing, providing more opportunities for brokers and lenders, while cash-heavy investors can find attractive deals.

However, she cautions the environment remains tough for those requiring external capital. “If you need to raise capital in order to do your investments, you’re going to be in a lot of trouble, because equity is really tough to source right now.”

The California commercial real estate market is in transition, with fundamental changes in valuations, financing, and risk assessment creating challenges and opportunities. Success will depend on conservative leverage, access to capital, and readiness to act quickly.

As Walker puts it: “We’re in Darwinian times. You’re going to see the survival of the fittest. If you’re already strong and you’re already doing well, you’re probably going to keep doing well.”