The commercial real estate (CRE) winners and losers that emerged in the first quarter of 2025 largely reflect broader trends in the national economy. Insights from Kidder Mathews experts across the Western U.S. spotlight which markets are outperforming expectations—and which are falling short—as new patterns in demand, capital deployment, and policy take shape.
Regional Standouts and Underperformers
In the Pacific Northwest, Will Frame, EVP in Kidder Mathews’ Tacoma, WA office, identifies healthcare as a sector poised for a strong rebound in 2025. Healthcare transaction volume has declined in recent years, following record activity between 2018 and 2022, but Frame expects renewed momentum driven by robust leasing activity and significant pent-up buyer demand. “With average vacancy rates between 2% and 5% and tenant renewal probabilities exceeding 95%, healthcare assets remain dependable, low-risk investment opportunities,” says Frame. He attributes the sector’s resilience to its stability across economic cycles and a steady flow of institutional capital over the past 15 years.
The recent slowdown in transaction volume, he notes, stems largely from a pricing disconnect—sellers holding firm on compressed cap rates. As interest rates begin to decline, these cap rates are becoming more palatable for buyers under pressure to deploy capital on behalf of investors.
In contrast, urban office continues to face headwinds. “Pre-COVID, strong tenant demand drove a wave of downtown development in markets like Los Angeles, Seattle, and San Francisco,” Frame explains. “Many investors purchased at low interest rates, banking on continued rent growth and high occupancy—but that hasn’t materialized.” Remote work and rising borrowing costs flipped the script, pushing vacancy rates up and rental rates down.
Many owners now hold assets worth significantly less than they paid, leading to an average 70% discount from acquisition pricing. “Recovery will depend on a sustained return-to-office trend,” Frame says. “Until then, urban office remains a challenging asset class with a long road back to stability.”
Simon Mattox, SVP in Kidder Mathews’ Los Angeles office, sees strength in multi-tenant retail across Southern California. This sector is benefiting from a buyer’s market and ample available capital, particularly for assets with stable tenant mixes.
“Deals with neutral or positive leverage are especially attractive right now,” says Mattox. However, he cautions that low-cap-rate retail assets are struggling as the buyer pool shrinks—an effect of the slowdown in apartment sales, which previously funneled reinvestment capital into retail.
Regulatory Pressure and Port Disruptions Kevin Sheehan, Managing Director in Kidder Mathews’ Sacramento office, takes a more cautious view. He anticipates the Southwest outperforming in 2025 for many of the same reasons the West Coast is under pressure.
Sheehan cites political friction with the federal administration, potential funding cuts for homelessness initiatives, and port activity disruptions due to tariffs as key headwinds in California, Oregon, and Washington.
“These ports are vital economic engines and if port volume decreases, that could impact the commercial market,” he says. “In addition, if funding is pulled from critical social programs, it could create an unfriendly environment for business.”
West Coast markets, heavily reliant on tech and agriculture, are also vulnerable to tariffs and labor shortages. “A continued exodus of high-earning residents from California will further strain tax revenues and commercial activity,” Sheehan notes. “I expect more companies will leave the state, impacting both sales and leasing markets.”
Markets, Asset Types & Factors Driving Demand
Despite near-term turbulence, Frame believes pent-up demand will fuel increased activity across the West Coast as interest rates ease and pricing expectations converge.
“Private capital is leading the way, especially in deals under $10 million,” he says. “Family offices, 1031 exchange buyers, high net-worth individuals, and small syndicators are targeting smaller, income-generating assets in fast-growing suburban and secondary markets.”
Institutional players remain cautious, focusing on core-plus and distressed deals, which leaves private capital as the primary driver of transaction volume.
Investors are prioritizing stability—solid tenants, long leases, minimal turnover—making sectors like healthcare, small-bay industrial, and essential retail particularly appealing. “The gap between buyers and sellers is narrowing,” Frame adds, “and that’s helping more deals get across the finish line.”
The major demand drivers in the San Francisco Bay Area in 2025 are expected to be migration to peripheral areas, housing affordability, local policy shifts, and tech employment. San Francisco has been implementing a focus back to mandated in-office work hours. However, this shift has not appeared to affect the desire of those living outside the city to pay higher inner-city apartment rents for less desirable living situations.
In Southern California, Mattox says interest rate sensitivity and regulatory policy will heavily influence retail demand in 2025. “Liquidity remains strong, but the slowdown in multifamily sales is impacting retail buyer activity at lower cap rates.”
Consumer behavior and migration patterns continue to favor the region, and any tax or investment incentives could further shift market momentum. “If the 100% accelerated depreciation policy is reinstated, that could significantly boost CRE sales,” he notes.
Sectors like healthcare, industrial, and essential retail are experiencing strong interest thanks to ongoing demand for outpatient care, logistics, and neighborhood services. On the flip side, tighter regulations in some urban cores are pushing investors toward more predictable, stable opportunities. Altogether, these factors are setting the stage for a more active and focused year for West Coast CRE.
CRE Investment Trends to Watch
Matt Marschall, ARA, MAI, AI-GRS, FRICS, and SVP in Carlsbad, emphasizes that investors are focused on “resilience, scalability, and relevance.” He says capital is flowing into sectors aligned with long-term growth and the expanding digital economy.
Office investment may surprise to the upside—not from growth, but from pricing corrections. “Buyers are stepping in for well-located assets with repositioning potential,” Frame notes. Marschall agrees but adds that unless it’s a trophy asset in markets like Seattle or San Diego, most capital remains on the sidelines.
Remote work has permanently altered demand, and valuations—especially in downtown cores like San Francisco—have yet to stabilize. Some investors are exploring office-to-residential conversions, but the complexity of these deals limits widespread participation.
At the top of Marschall’s list of investment interest is data center development, which has become the new land rush in the region. “With the explosion of AI and cloud computing, markets like Phoenix, Reno, and Hillsboro, Oregon are emerging as data infrastructure hubs,” he says. “Investors are prioritizing sites with abundant power, strong fiber networks, and local government support.” In places like Phoenix, where power capacity and affordability converge, capital is flowing aggressively into both greenfield developments and existing facility expansions.
Retail continues to attract selective investment. Frame points to solid grocery-anchored centers as a safe bet. Mattox agrees, noting that investors are favoring stabilized assets with service-based tenants over speculative developments.
Industrial remains a core investment, particularly in the Inland Empire, though new capital is also flowing to more affordable regions like Salt Lake City and Sacramento. Cold storage is gaining traction in California’s Central Valley due to agriculture’s logistical needs.
Pete Klees, SVP in Kidder Mathews’ Phoenix office notes caution in the industrial sector. “We have an oversupply of distribution space in the Phoenix market, which has pushed vacancy from the low 6% range in 2023 to double that in 2025. The tariff war could further weaken warehouse space demand.”
Multifamily is another major draw, particularly in the Sun Belt and high-growth markets like Boise, Tucson, and Bakersfield. Institutional capital is favoring workforce housing, build-to-rent communities, and infill projects in suburbs with strong employment growth. “Speed to market is key, so entitled land and by-right development are in high demand,” notes Marschall.
Still, Sheehan expects flat performance in apartments this year, especially for new market-rate construction. “Funding for affordable housing has dried up,” he says. “We may see trades in higher-end assets with upcoming loan maturities, but mostly B and C properties will be active.”
In the Bay Area, Gabriel Sahagun of Kidder Mathews’ Pleasanton office sees strength in suburban multifamily markets like Walnut Creek, Concord, and Pleasanton. “Renters priced out of San Francisco are flocking to these areas, where policies are becoming more landlord-friendly,” he says.
San Francisco and Oakland, on the other hand, remain challenged by high costs, restrictive ordinances, and crime. “Investors are shifting toward more flexible, pro-growth municipalities,” Sahagun notes. Suburban garden-style and mid-rise apartments offer affordability, space, and better schools—appealing to today’s renters.
Sheehan adds, “Investment activity will be centered around industrial properties and value add for large retail box properties. We have in the past always had the State agencies and medical and construction to carry the West Coast markets (and tech until now). Those product types and companies in those industries will face some challenges for the next couple of years.”
Looking Ahead
As the first quarter closes, CRE on the West Coast reflects a complex, evolving market. Some sectors are gaining ground through demographic trends, policy changes, and macroeconomic shifts, while others continue to face pressure from pricing corrections, oversupply, and regulation.
Frame says, “We’re going to see more capital flowing into high-growth, affordable markets with strong demand and fewer regulatory hurdles. Those are the ingredients investors are prioritizing in 2025.”
While it’s too early to quantify the full impact of the new White House policies, early signs suggest a reshaping of investment flows and market leadership. The rest of the year promises both opportunity and caution—depending on how well markets can adapt.
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