Inflation and Rising Costs Won’t Slow Multifamily Momentum

Vacancy rates across the state are showing improvement, particularly in San Francisco, which reflects California’s housing shortage. Demand also remains strong, and supply is growing, suggesting confidence in the sector despite rising labor and construction costs. In light of the recent California wildfires, future development is likely to increase further as displaced homeowners seek temporary apartment housing. Hybrid work models continue influencing multifamily development and design as tenants seek flexibility and social connectivity in their living arrangements. Allen Matkins’ Jennifer Jeffers, senior counsel, and Partner Spencer Kallick discuss the demand for new development, the trend toward smaller and larger units, and the impact of recent return to work mandates in the Winter 2025 Allen Matkins/UCLA Anderson Forecast California Commercial Real Estate Survey.

Even with Increasing Rents, New Development is Booming

According to Kallick, “The most constant thing that we're hearing from people is they want to build multifamily.” In light of the recent fires in and around Los Angeles, there is a tremendous need for housing, which has driven up rental rates, but even before then, there was not enough supply. Jeffers sees rising development costs, especially construction costs, as the clearest explanation for increased development, along with increased rents. Other factors include the fact that new development has favored high-end and luxury units, which cost more money to build and command higher rents.

For Kallick, land prices and higher interest rates are driving more people into for-rent units. There is also more and more desire to build for-sale product (townhomes, condos) than he’s ever seen before.

New Development, Fundamentally

From the Bay Area down to San Diego and everything in between, Kallick is seeing a tremendous high demand for housing. “The state has gotten very serious about incentivizing and requiring cities to plan for housing, so there’s going to be a lot more activity on the housing front.”

Jeffers noted that, “Nationally, the Sunbelt and Mountain West regions continued to dominate multifamily construction in 2024, but the wave of apartment deliveries is expected to decrease in 2025.” In California, however, development is expected to increase this year. San Diego, the Inland Empire, and San Jose dominated California's multifamily development pipeline across 2024 in terms of percent inventory under construction. “The post-pandemic increase in remote work has continued to lead to increases in demand for suburban and less densely populated and affordable areas, such as the Inland Empire. Based on the percentage of housing inventory under construction, San Diego had the most robust California multifamily development market.”

“What I'm seeing is actually there are a lot of cities that have really bought into the state priority for building housing, and a lot of that, frankly, has to do with traffic,” says Kallick. “And what I mean by that is in the last cycle, they've built a lot of office space or a lot of studio space, and now they're realizing people are commuting for hours to get to their office and back. Why aren't we building housing in close proximity to these offices and these studios and these great commercial areas that we have in our city?”

Are Smaller Units Here to Stay?

Jeffers doesn’t think the trend of smaller units is necessarily here to stay. “Apartment unit size in big cities appears to be inching upward. In 2023, the share of two- and three-bedroom apartments increased compared to 10-year averages.” There has been an uptick in rental unit sizes in big cities like Washington, DC, San Francisco, Boston, Los Angeles, Chicago, and even Manhattan. Chicago and San Francisco stood out with some of the largest gains in floor space from 2023 to 2024.

“I think it really depends on where those smaller units are,” says Kallick. “If it's somewhere people can easily commute to their homes, and they need less space, it probably does make sense to have smaller units.” Some cities are trying to incentivize larger units, where multiple generations or young families can live. From a policy perspective they are needed as well to balance out some of those smaller units that have already been built.

What’s Trending?

The number one question Kallick is getting from clients, is could we build townhomes? Even in infill sites throughout LA County and Orange County, there is a lot more demand for for-sale multifamily housing, which dovetails with where the capital markets are right now, and the need for more than just rental housing.

Office conversions remain a favorite, though there's been a shift toward repurposed hotels, particularly in Manhattan. Jeffers sees legislative streamlining as a key factor in 2025. “California's poised to see dozens of new pro-housing bills go into effect this year. However, questions remain regarding the impact of the Trump administration on local housing based largely on his stated deportation plans, which would decrease workforce numbers, and his desire to implement tariffs, which would increase construction costs.”

If the trend of big tech companies returning to the office at least three days a week continues, more people should be expected to return to the Bay Area and other headquarters cities. According to Kallick, “We're definitely seeing people being a lot more intentional about what multifamily communities look like and what their needs are, especially in light of a lot more folks working from home and working remotely or interchangeably working from home and the office.”