California Commercial Real Estate Survey conducted by UCLA underscores substantial transformations within the state’s commercial real estate industry – which is the industry trend setter throughout the United States as always. These trends and market modifications are propelled by the increasing utilization and necessity of system-wide cloud computing, accelerated machine learning, advanced artificial

intelligence (AI) develepment, and a seemingly endless hybrid work paradigm. The confluence of these above reasons has collectively led to an increase in data center demand and associated digital infrastructure emerging as the fastest-growing sector in new industrial initiatives in the ever-changing commercial real estate market. The poll yielded some significant insights on the new data centers and infrastructure trends as described below.

    Progression of Industrial Advancement: The Dominance of Digital Infrastructure

    The industrial and commercial real estate sector is seeing a significant transformation, propelled by the swift advancement of technology, namely cloud computing, machine learning, and artificial intelligence. Digital infrastructure, particularly modern data centers, has become the major driver of industrial advancement and a necessity for companies to compete for market share. This year, 38% of poll respondents recognized digital infrastructure as the primary driver of new projects, a notable rise from 17% in the last survey. The tangible impact of e-commerce has diminished, now representing about 28% of development activity, a significant decrease from its former 50% share.


    Notwithstanding these trending changes, industrial real estate continues to be a robust asset class, especially in Northern and Southern California, where 50% and 54% of respondents, respectively, foresee ongoing construction expansion, driven by the escalating demand for sophisticated technology infrastructure. Although other parts of the country might not be experiencing the same numbers yet it is only a matter of time before these trends take hold in the more technology different cities in the US.  Investors poised to exploit this transformation are likely to gain from the rising institutional and corporate demand for data-driven industrial assets – the writing is on the wall.

    Evolution of the Retail Market: The Rise of Mixed-Use Developments

    As e-commerce transforms consumer behavior, the retail sector is strategically shifting towards mixed-use spaces as every investor, building owner, asset manager and property manager is looking for more yield. The necessity for strong digital infrastructure to combat and facilitate online retail expansion is increasing, while physical stores are transforming into experience venues aimed at boosting foot traffic and consumer interaction.  The user experience is paramount to driving eyeballs and wallets and this trend appears to be robust and unrelenting.

    Developers are increasingly emphasizing developments that amalgamate retail with residential, office, and entertainment elements, so creating dynamic, multi-functional ecosystems that generate enduring value. These mixed-use assets not only reduce the risks linked to conventional retail but also leverage changing demographic preferences and urbanization trends, establishing them as attractive investment prospects in the transforming retail environment.  These types of development strategies are popping up everywhere and old died-in-wool owners need to take notice.

    Office Market Transformation: AI Expansion and Hybrid Work Reshape Demand

    Needless to say the office sector is undergoing a pivotal shift, particularly in major technology hubs like San Francisco and Silicon Valley. While the broader market has faced headwinds, investor sentiment remains optimistic for Northern and Southern California. A key driver of this shift is the rapid expansion of AI-driven employment, which has surged by 59% since January 2024, contributing to the first decline in San Francisco office vacancy rates since 2019 according to the UCLA survey.

    The persistence of hybrid work models, coupled with emerging return-to-office mandates, is reshaping demand dynamics—favoring smaller, more adaptable office footprints over traditional large-scale spaces. With new office development slowing, investor focus is shifting toward the repositioning of existing assets, emphasizing high-speed digital infrastructure, energy efficiency, and enhanced accessibility. This evolving landscape presents opportunities for strategic capital deployment in well-located office properties primed for modernization.  Asset manager and property managers are at the forefront of these market-changing trends, and the property owners and investors need to get on board.

    A tangible, visible and fundamental shift in industrial real estate development is being driven by a combination of technological factors, including the growing reliance on high-speed connectivity across both industry and commerce, as well as the rapid expansion of apps that utilize artificial intelligence across almost all industries. The manifestation of this obvious transformation is the increasing prioritization of new data center facilities that are strategically located in locations that provide dependable access to vital modern infrastructure. These developments are located in regions that have stable power grids, plentiful water resources, and robust fiber-optic networks. Additionally, investors and developers are selecting areas that have limited exposure to natural hazards. This ensures that the operations will be resilient over the long run and that risks will be mitigated properly, or as much as reasonably possible.

    The results of the UCLA survey strongly suggest that this trend is not only continuing, but that it is also anticipated to intensify in the years to come. This is because the exponential growth of digital infrastructure is continuing to shape the industrial asset class. Due to the fact that businesses are becoming more and more reliant on artificial intelligence-driven computing power, cloud storage, and edge computing, the demand for data centers that are strategically positioned and have high performance is expected to continue to be a dominant force in industrial real estate investment and development initiatives.  Property owners, asset and property managers need to be on top of this trend to continue to generate top level returns.

    David Roberson
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