Today’s real estate market presents a complicated picture. Home prices remain elevated, but affordability has deteriorated. Rents appear steady, yet concessions and higher cap rates have reduced apartment values. Capital remains available, but it is increasingly selective. At the same time, years of inflation have increased costs across nearly every part of the real estate business. Labor, materials, insurance, utilities, property taxes, and services have all become more expensive. For investors and developers, the headlines do not tell the full story. The economics beneath them ultimately determine land values, project feasibility, and future opportunities.
Housing’s Affordability Challenge
The California Association of Realtors’ research indicates that 19% of California households could afford the $916,750 median-priced home during the second quarter of 2026, based on a 6.54% effective mortgage rate.[1] Now that interest rates are about 1% higher than referenced in the study, it is clear affordability has been further impacted.
Higher mortgage rates are only part of the challenge. Builders continue to face elevated construction costs driven by labor shortages, insurance premiums, government fees, and the higher cost of materials and services. While inflation has moderated from its peak, many of these expenses remain permanently higher than pre-pandemic levels.
Builders have responded with mortgage rate buydowns and other incentives. John Burns Research and Consulting estimated that incentives represented approximately 7-8% of new-home prices, compared with a historical range of approximately 3-3.5%.[2]
These incentives help lower monthly payments without reducing the advertised price, but the cost must come from somewhere. With construction expenses, operating costs, and profit margins largely fixed, land value often absorbs the difference. The same dynamic is occurring across many property types as owners face rising operating expenses while revenue growth slows.
Pressure on Land Values
Land value is the amount remaining after a builder accounts for construction costs, government fees, financing, buyer incentives, and the required profit margin. As those expenses rise faster than home prices, the amount a builder can justify paying for land declines.
The apartment market faces similar pressure. RealPage reported that 16.9% of stabilized apartments offered concessions in April 2026. The average discount was 11%, equivalent to nearly six weeks of free rent on a 12-month lease. Together, these conditions widen the gap between landowners’ expectations and what builders can support under current underwriting.[3]
Industrial Is Resetting
The Inland Empire industrial market showed signs of stabilization in Q3 2026. Vacancy declined slightly to 7.2%, while the market recorded 1 million square feet of positive net absorption. However, availability increased to 12%, and average taking rents fell to $1.01 per square foot per month as landlords remained motivated to secure tenants.
Development also picked up, with the construction pipeline increasing 34.8% from the prior quarter to 8.3 million square feet. Much of this activity is focused on big-box facilities, reflecting continued demand for modern logistics space of 500,000 square feet or more. Although leasing slowed from the previous quarter, limited deliveries, positive absorption, and renewed developer confidence suggest the market is gradually moving toward greater balance.[4]
As existing space is absorbed and development remains limited, opportunities may emerge for disciplined developers to control well-located, entitled industrial sites.
Capital Remains Selective
Federal Reserve survey results showed that banks eased commercial real estate lending standards during the second quarter of 2026, marking the most significant easing since early 2022. However, standards remained selective, and the improvement was not uniform across all borrowers and loan categories.[5]
Although banks have begun easing lending standards, construction and land financing remain limited and expensive. At Shopoff, we have seen a slight ease over the past quarter, but lenders remain selective, and the financing process continues to take longer than it has in prior cycles. Capital is available, but it is concentrating around experienced sponsors, clear business plans, and investments with visible paths to execution.
Positioning for 2027
I remain constructive about 2027, but our outlook does not depend on falling interest rates. We are underwriting to current conditions and treating any future rate relief as additional upside.
Our focus heading into the end of the year and beyond, remains on Southern California infill and covered-land opportunities and Inland Empire industrial sites. The current environment is challenging, but it is also restricting new supply and creating opportunities for patient, experienced, and well-capitalized firms. By remaining disciplined and ready to act, we believe we will be well positioned as liquidity improves, and the next market cycle takes shape.
Disclosures
References to proposed projects, governmental approvals, market conditions, and potential housing capacity do not assure that any project will obtain financing, commence construction, be completed, or achieve any particular financial or community outcome.
Third-party information is believed to be reliable as of the publication date, but its accuracy or completeness is not guaranteed. Readers should review the cited sources directly.
This communication is provided for informational and educational purposes only. The views and opinions expressed herein are those of the author as of the date of publication and are subject to change without notice. Past performance is not indicative of future results. This is not an offering to buy or sell any securities. Such an offer may only be made through the offering’s memorandum to accredited investors. Any investment in Shopoff Realty Investments (“SRI”) programs involves substantial risks and is suitable only for investors who have no need for liquidity and who can bear the loss of their entire investment. The performance of former assets is not indicative of the future results of other assets. Securities offered through Shopoff Securities, Inc. (“SSI”) member FINRA/SIPC. Certain statements contained herein are forward-looking in nature and are based on current expectations, estimates, and projections. Actual results may differ materially due to a variety of factors. Market conditions and trends discussed herein may not continue and are subject to change.
[1] C.A.R., https://www.car.org/aboutus/mediacenter/newsreleases/2026releases/2qtr2026HAI
[2] John Burns, https://wearetbo.com.br/en/blog/builder-incentives-became-the-price-2026
[3] Realpage, https://www.realpage.com/analytics/us-concessions-april-2026/
[4] CBRE, https://www.cbre.com/insights/figures/inland-empire-industrial-figures-q3-2026
[5] Federal Reserve, https://www.federalreserve.gov/data/sloos/sloos-202607-table-1.htm
