FED CUTS ARE NOT HELPING

Commercial Real Estate Faces Reality: Delinquencies, Declines, and “Extend & Pretend”

November 2, 2025 – by Gary McKae

From rising delinquencies on car loans to falling residential rents and home prices across the nation, the commercial real estate (CRE) market is no longer the “protected class” it once seemed.

Office CMBS Delinquencies Hit Record Highs

The delinquency rate of office mortgages securitized into commercial mortgage-backed securities (CMBS) spiked to 11.8% in October — the highest ever recorded and more than a full percentage point higher than during the 2008 Financial Crisis, according to Trepp, which tracks and analyzes CMBS performance.

These loans “were good until they suddenly weren’t.”
In October 2022, the office CMBS delinquency rate was just 1.8%. In three years, it has exploded by 10 percentage points.

Flight to Quality and Corporate Downsizing

Older office towers are being crushed by a flight to quality and corporate downsizing.
The long-anticipated return-to-office (RTO) movement has stalled, leaving vacancy rates high. Even newer towers are under stress as companies consolidate office footprints and focus on hybrid models.

For multifamily CMBS, delinquencies have also risen sharply — now at 7.1%, the highest since December 2015.
Multifamily CMBS are backed by apartment property mortgages, where oversupply and softening rent growth are eroding returns.

Newly Delinquent Loans and Maturity Defaults

Loans become delinquent when a borrower fails to make payments or fails to repay upon maturity — a “maturity default.”

A major example: the $304 million mortgage on Bravern Office Commons in Bellevue, WA.
This 750,000-square-foot, two-tower complex completed in 2010 is now vacant, following Microsoft’s 2023 decisionnot to renew its lease. That single event pushed the property into delinquency in October.

Who’s on the Hook for CRE Losses?

For office mortgages, a large share of the exposure lies outside the banking system — dispersed among investors worldwide through CMBS and CLOs held by bond funds, insurers, office REITs, and mortgage REITs.
Private equity and private credit firms also hold significant exposure.

Banks, however, still carry a portion. Many have already written down losses and sold bad loans at discounts to clear their balance sheets.
Even foreign banks — such as Deutsche Bank, which once aggressively expanded into U.S. office lending — have reported substantial losses.

Multifamily Debt: The Largest Exposure

Multifamily remains the largest CRE debt category, with $2.2 trillion in mortgages outstanding at the end of 2024 — about 45% of the $4.8 trillion total CRE debt, per the Mortgage Bankers Association.

• Over half of this debt has been securitized through Fannie Mae and Freddie Mac, whose exposure has doubled in the past decade.

• Banks and thrifts hold about 29%, life insurers 12%, and private-label CMBS/CDOs/ABS roughly 3%.

• State and local governments hold a small remaining share.

The relatively limited exposure of U.S. banks to CRE loans means this downturn is unlikely to become a systemic banking crisis. Most losses are being absorbed by investors and government-backed securities — allowing the Federal Reserve to let the market correct itself.

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California’s Hidden Sector: Hard Money Multifamily Loans

In California, a quiet but critical segment of the market is showing stress: 5–14 unit multifamily properties financed by hard money lenders.

There is no centralized delinquency data for this segment because it’s financed by individual investors seeking high returns through private syndicators. Unfortunately, many of these investors don’t fully understand the risks, and syndicators often fail to disclose them.

Throughout 2025, I’ve identified numerous small multifamily properties in foreclosure or default, oscillating between Notice of Default and temporary cure — or what many in the industry now call “Extend and Pretend.”

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LLCs, Hard Money, and the Bankruptcy Maze

Compounding the problem:

• The multifamily property is typically owned by an LLC.

• The hard money lender is also structured within a corporate entity or LLC.

When defaults occur, investors struggle to collect their funds. The managing member often files for Chapter 11 bankruptcy, allowing continued control while foreclosure attempts are stayed by the court.
Resolution usually comes only after the property is sold and proceeds are distributed — a process that can take years.

Meanwhile:

• Property taxes accrue with penalties,

• Maintenance deteriorates, and

• City red tags over permit or habitability violations pile up.

Ultimately, buyers inherit these issues, often hoping for a discounted price that compensates for deferred costs.

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“Extend and Pretend”: A Lingering Cycle

This “extend and pretend” era — where lenders and borrowers agree to temporary extensions to avoid recognizing losses — continues to define much of today’s smaller multifamily market.
While some partial portfolio sales offer relief to investors, most remain trapped until liquidation.

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Acknowledgment

Special thanks to Wolf Richter of Wolf Street for his exceptional reporting and data insights that contributed to the foundation of this analysis.
www.wolfstreet.com

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Final Thoughts

California remains one of the most dynamic real estate markets in the world — and one of the most challenging.
For landlords, tenants, and investors alike, understanding the true relationships between price, rent, and regulation has never been more critical.

📘 For more information on landlord-tenant regulations or to receive a copy of my Renter’s Survival Guide, contact me directly.

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Gary McKae
Commercial Real Estate Advisor | Investor Advocate | Author
📍 McKae Properties, Inc.
📧 gary@pacwestcre.com
🌐 www.mckaeproperties.com
📞 (650) 743-7249
🏢 2044 Union Street, San Francisco, CA 94123
DRE# 01452438

📌 Want to know how these trends affect your portfolio?
Schedule a consultation or visit www.mckaeproperties.com for the latest market insights.

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© 2025 Engel & Völkers. All rights reserved. Each brokerage independently owned and operated. All information is deemed reliable but not guaranteed. If your property is currently represented by another broker, this is not a solicitation. Engel & Völkers supports the principles of the Fair Housing Act and Equal Opportunity Housing.

Rents Declining

                                      

Rental Market Shifts: What’s Really Driving Peninsula Prices

October 13, 2025 – by Gary McKae

I recently reviewed rental prices across the San Francisco Peninsula after several things caught my attention:
1️⃣ A buyer exploring a multi-family investment.
2️⃣ A recent CoStar report on national rent trends.
3️⃣ My own curiosity about local rental housing.
4️⃣ Personal interest in residential purchase opportunities.

Rents and Prices: The Asset Class Connection

Over the years, I’ve watched home prices and rents move in tandem. That’s because both are driven by the same underlying factor—real estate as an asset class.
Every property has an intrinsic value tied to its highest and best use—whether that’s a ranch, a farm, an office building, or a single-family or multi-family residence.

When housing prices rise, rents naturally follow. As homeownership becomes less attainable, more people are forced into the rental market. Combine that with Gen Z’s preference for flexibility, urban convenience, and child-free lifestyles, and apartments remain the housing type of choice.

A Sudden Shift: Rent Drops in September

What truly surprised me in my latest review was the dramatic decline in rents for September.
According to CoStar, “U.S. monthly apartment rent growth declined last month in its deepest September drop in more than 15 years as excess supply affected all parts of the country.”

The national average rent fell to $1,712, a 0.3% decrease from August’s $1,717. This marks the third straight monthof flat or negative rent growth — a clear signal of softening demand despite seasonal adjustments.

Local Snapshot: Redwood City and Palo Alto

In Redwood City, I found homeowners out of sync with the current market. Asking rents were being cut by $1,000 per week, and Palo Alto, typically a strong market, also showed steady declines.
Owners using Zillow are dropping prices, lowering credit-score requirements, and allowing pets—a soon-to-be-irrelevant change as new California laws will require broader acceptance of pets in rentals.

We’re also seeing the return of landlord-paid landscaping and water, signaling a competitive shift back to pre-pandemic standards.

Impact on Multi-Family Investments

This softening rent trend will ripple through the multi-family sales market.
Offering Memorandums that rely on Pro Forma rents to justify higher cap rates are increasingly unreliable.
Instead of rent growth, Peninsula investors may be fortunate just to hold steady.

San Francisco: A Contrarian Recovery

Interestingly, San Francisco is bucking the national trend, posting 6.1% annual rent growth.
After years of decline during the pandemic’s “work-from-home exodus,” the city is rebounding as AI firms and tech employers mandate a return to the office.
This resurgence is re-energizing the local rental market—both for apartments and homes.

The Changing Face of Landlords

Single-family rentals have long been the realm of “Mom & Pop” landlords—owners who inherited homes or converted past residences into investments.
Two waves reshaped this market:

• First, institutional investors buying REOs after the foreclosure crisis.

• Second, corporate buyers and REITs seeking steady cash flow.

Now, new California landlord-tenant laws have shifted the balance of power toward tenants.
Landlords face stricter health, safety, and habitability standards—with Superior Courts often siding with tenants.
Many small landlords are selling to avoid escalating fines and compliance costs, while others are moving assets to states with lower taxes and fewer regulations.

The Migration Continues

The out-migration from California is not just about lifestyle—it’s economic.
Lower property taxes and income taxes elsewhere translate to higher net operating income and better cap rates.
For investors, this migration trend presents a strategic opportunity to diversify portfolios into growth states offering more favorable returns.

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Final Thoughts

California remains one of the most dynamic real estate markets in the world, but it’s also among the most challenging.
For landlords, tenants, and investors alike, understanding the true relationship between price, rent, and regulation has never been more important.

For more information on new landlord-tenant regulations and tenant rights, contact me for a  copy of my Renter’s Survival Guide

Gary McKae
Commercial Real Estate Advisor | Investor Advocate | Author
📍 McKae Properties, Inc.
📧 gary@pacwestcre.com
🌐 www.mckaeproperties.com
📞 (650) 743-7249
📍 2044 Union Street, San Francisco, CA 94123
DRE# 01452438

📌 Want to know how this affects your portfolio or property plans?
📅 Schedule a consultation or visit www.mckaeproperties.com for market update

©2025 Engel & Völkers. All rights reserved. Each brokerage is independently owned and operated. All information provided is deemed reliable but is not guaranteed and should be independently verified. If your property is currently represented by a real estate broker, this is not an attempt to solicit your listing. Engel & Völkers and its independent License Partners are Equal Opportunity Employers and fully support the principles of the Fair Housing Act.

Government Shutdown

 

WHEN THE U.S. GOVERNMENT SHUTS DOWN — CREDITABILITY TAKES THE FIRST HIT

When the U.S. Government shuts down, the first and most immediate impact is credibility. The global community begins to question whether the United States can honor its commitments — from paying its bills to maintaining economic stability.

The Immediate Effect: Residential Real Estate

Real estate professionals first look to the residential market for signs of disruption. During a shutdown, key federal agencies slow down or completely halt essential services:

• Federal Flood Insurance policies are held up.

• Federal Housing Administration (FHA), Veterans Affairs (VA), and U.S. Department of Agriculture (USDA)loans may face significant processing delays or suspensions.

• The IRS may stop processing tax transcripts or income verifications, which can stall or kill mortgage approvals.

These disruptions ripple through home sales, refinancing, and construction starts — creating uncertainty for lenders, buyers, and builders alike.

The Broader Impact: Commercial Real Estate

The far-reaching consequences are even more severe in Commercial Real Estate. The absence of federal data and market guidance injects uncertainty into every corner of the financial system:

• Reduced demand for commercial property as both government agencies and private businesses delay or cancel leasing and development projects.

• Financing becomes difficult as banks hesitate to fund new deals amid unclear economic forecasts.

• Permits and approvals are delayed, leaving construction and redevelopment projects in limbo.

When federal agencies close, vital economic data stops flowing. Without labor statistics, inflation reports, and housing-start figures, even the Federal Reserve lacks the information it needs to make sound policy decisions. Multifamily investors lose visibility into key indicators like building permits and housing completions — critical tools for analyzing market supply.

The Sectoral Fallout

The Retail, Hospitality, and Senior Housing sectors feel the pain first. Hospitality is especially vulnerable as consumer spending tightens. Areas with a high concentration of government workers face furloughs and layoffs, further depressing local economies.

Small businesses — particularly restaurants, retailers, and service providers — are hit the hardest. Operating on thin margins, many are forced to close or take on debt just to survive.

Meanwhile, Federal and Institutional Commercial Real Estate markets freeze. Properties sit unsold, leases remain unsigned, and Real Estate Investment Trusts (REITs) dependent on steady rent payments struggle to cover operating expenses. Dividends may be suspended, leaving income-dependent investors — retirees in particular — exposed.

Construction Comes to a Halt

Government-funded construction projects stop immediately. Developers depending on progress payments or public contracts face mounting fixed costs with no relief in sight. Completed developments and remodels face “Due on Completion” clauses that can’t be met because buyers disappear. Foreclosure notices rise as lenders — themselves under pressure — hesitate to assume property ownership costs.

Turning Lemons Into Lemonade

Amid the chaos, cash-rich investors find opportunity. With credit markets frozen and fear widespread, high cap rates and favorable terms return to the market — conditions unseen since the last major economic disruption.

Those with liquidity, discipline, and a long-term view will find that a government shutdown, while painful, can also reset pricing and create generational buying opportunities.

👉 Bottom line: This rate cut signals the start of a new easing cycle. For real estate, it may not be transformative on its own, but it restores momentum at a time when confidence has been under pressure. The real question now is how quickly the Fed follows through — and whether inflation allows them to keep cutting.

Gary McKae
Commercial Real Estate Advisor | Investor Advocate | Author
📍 McKae Properties, Inc.
📧 gary@pacwestcre.com
🌐 www.mckaeproperties.com
📞 (650) 743-7249
📍 2044 Union Street, San Francisco, CA 94123
DRE# 01452438

📌 Want to know how this affects your portfolio or property plans?
📅 Schedule a consultation or visit www.mckaeproperties.com for market update

 

THE FED MAKES FIRST CUT

The Federal Reserve cut its benchmark interest rate by a quarter percentage point on Wednesday — the first reduction in nine months. Policymakers now project at least two more quarter-point cuts before year-end, up from earlier forecasts. The move brings the federal funds target range down to 4%–4.25%, after holding steady through five consecutive meetings.

Why the Shift?

Recent data shows slowing payroll growth, rising unemployment, and persistent inflation pressures. Fed Chair Jerome Powell acknowledged these mixed signals:

“Unemployment remains low, but we see downside risks,” Powell said.

Inflation has climbed for four consecutive months, hitting the highest level since early 2025, even as job creation has stalled. That combination of slower growth and rising prices — stagflation — forced the Fed’s hand.

Political pressure has also intensified. President Trump has repeatedly criticized Powell for being slow to ease, while controversy surrounding Fed board members added tension to this week’s meeting.

Market and Real Estate Reactions

Commercial and residential real estate professionals see the cut as a welcome, if modest, catalyst:

• Commercial: Lower financing costs could revive deal activity, particularly in multifamily and equity-driven transactions. Office remains the laggard but may see a morale boost.

• Residential: Mortgage rates have already ticked lower. Freddie Mac reports the 30-year fixed average fell to 6.35%, its lowest since October 2024. If rates trend below 6%, more buyers could reenter the market, and refinancing opportunities would expand.

As Josh Winefsky of HSF Kramer noted:

“It brings some positive momentum to a category that needs it.”

Parallel Moves Abroad

The Bank of Canada also cut its overnight lending rate by 25 basis points, to 2.50%, its first reduction in six months. This synchronized easing adds further momentum to global capital markets.

What Comes Next?

The Fed’s “dot plot” now implies two additional cuts in October and December. Yet, divergence among policymakers remains — one member pushed for a half-point cut this week. Powell emphasized a “meeting-by-meeting” approach, acknowledging the delicate balance between cooling inflation and supporting jobs.

Implications for Housing and Investment

Lower borrowing costs may:

• Entice sidelined buyers back into housing markets.

• Encourage homeowners to list, easing supply shortages.

• Boost refinancing activity, improving household cash flow.

For commercial real estate, incremental cuts won’t solve systemic challenges like tariffs, high construction costs, or structural office vacancies. But as BGO’s Ryan Severino put it:

“If it portends looser monetary policy ahead, it could provide a safety net — even if monetary policy cannot fix everything that ails the economy.”

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👉 Bottom line: This rate cut signals the start of a new easing cycle. For real estate, it may not be transformative on its own, but it restores momentum at a time when confidence has been under pressure. The real question now is how quickly the Fed follows through — and whether inflation allows them to keep cutting.

Gary McKae
Commercial Real Estate Advisor | Investor Advocate | Author
📍 McKae Properties, Inc.
📧 gary@pacwestcre.com
🌐 www.mckaeproperties.com
📞 (650) 743-7249
📍 2044 Union Street, San Francisco, CA 94123
DRE# 01452438

📌 Want to know how this affects your portfolio or property plans?
📅 Schedule a consultation or visit www.mckaeproperties.com for market update

 

Chapter 22: When Chapter 11 Isn't Enough

 Chapter 22: When Chapter 11 Isn’t Enough

Chapter 11 of the U.S. Bankruptcy Code provides a legal framework for businesses—and in some cases individuals—to reorganize their finances and continue operating while repaying creditors. Unlike Chapter 7 liquidation, which involves selling assets, Chapter 11 is designed for rehabilitation and a “fresh start.”

But in today’s environment, that first fresh start often isn’t enough. When companies return to court for a second restructuring, it’s jokingly referred to as “Chapter 22.”

Why Chapter 22 Is Rising

The prolonged high interest rate environment, combined with pandemic-era shifts in shopping and work patterns, has left many companies struggling. Retailers in particular were hit twice:

• First, as consumer traffic shifted online or out of urban centers.
• Second, as borrowing costs surged, making it harder to refinance debt.

The result? A wave of repeat bankruptcies.

• Claire’s has filed twice.
• Joann, Rite Aid, Forever 21, Party City, and Tuesday Morning have all made second trips through Chapter 11.
• Rue21 and Z Gallerie have filed three times.
• Bravo Brio Restaurants, Bar Louie, and Bertucci’s have also joined the list.

Some chains have shut down completely. Others have trimmed their store counts, renegotiated leases, or emerged under new owners.

Debt: The Double-Edged Sword

Debt has been one of the biggest killers. Low-interest debt after the financial crisis and into the pandemic allowed many struggling retailers to limp along. But when those debts matured in a world of 6–8% refinancing rates, the math no longer worked.

Even after shedding liabilities through bankruptcy, some retailers couldn’t fix the structural flaws in their businesses. Without addressing operations, supply chains, or consumer demand, another bankruptcy was almost inevitable.

What This Means for Commercial Real Estate

For property owners and investors, the ripple effects of retail Chapter 22s are significant:

• Lease Risk: Triple net lease (NNN) properties with tenants like CVS, Walgreens, and Rite Aid have hit the market with cap rates in the 7–9% range, signaling owner fears about closures.
• Vacancy Threats: When retailers fail, landlords are left scrambling to backfill space, often at lower rents.
• Opportunities: Not all locations close. Investors willing to research tenant financials and market fundamentals can find profitable leases—often with properties that survive reorganization and continue producing income.

The same patterns that started with bank closings have spread through pharmacies, restaurants, auto repair, beauty, and other main-street businesses. Owners who can separate distressed leases from durable ones may find bargains.

Looking Ahead

The lesson from Chapter 22 is simple: bankruptcy is not always a cure. For some companies, it’s only a pause button. But for savvy investors, these cycles create chances to buy strong locations at discounted prices.

🔑 Opportunity creates profits. The key is careful due diligence—knowing which tenants are likely to survive, and which properties will continue generating cash flow even if the name on the storefront changes.

Gary McKae
Commercial Real Estate Advisor | Investor Advocate | Author
📍 McKae Properties, Inc.
📧 gary@pacwestcre.com
🌐 www.mckaeproperties.com
📞 (650) 743-7249
📍 2044 Union Street, San Francisco, CA 94123
DRE# 01452438

📌 Want to know how this affects your portfolio or property plans?
📅 Schedule a consultation or visit www.mckaeproperties.com for market update

Jackson Hole Surprise

PACIFIC WEST INSIGHTS NEWSLETTER

AUGUST 25, 2025

Chairman Powell finally gave in to reality.  It was not or should not been a surprise that the economy is slowing down.  Bond yields have been dropping and mortgage rates have matched the decline measuring a 1/4 point drop in rates before they are called.

It has long been my contention that the FED, irrespective who runs it, have been late to the party.  They are either too slow to rise rates or too slow to lower rates.  DATA DEPENDENT is the major reason, Economic Thought maybe the other.  

Based upon the economic reports by the Census or Bureau of Labor, reports are late.  It takes time to gather information, compile the information, review and audit it and then make a finale review before publishing the report. It is the final review that can be shortened to allow a report to come out on a scheduled  day.  That was the last Labor Report that adjusted for past reports.  When the adjustment occur it is Shoot the Messenger time.  

The FED needs their own internal audit staff to review potential reports to use other sources to determine inaccuracies in governmental reports.  The Market is the best measurement of the potential reports.  It was said Alan Greenspan looked at the market before and after his speeches to determine the accuracy of his reports.  The market never lies.  The most accurate measurement of the market is the Bond Market.  The wealth of knowledge of those who operate in the market far outweigh the knowledge of Government employees and appointees. You cant pay enough to get those Market people to take drastic salary cuts to work in government.  At least until now by the Trump Administration!

There have been economists that supported rate cuts in May, June and July.  Now in September we will get 3 months in one.  Will there be a 150 basis point cut, 1.5%?  Treasury Secretary Bessent is in support of that.

The 2-year and 10-year Treasury Bond markets have been the most responsive to impending rate cuts.

An example of outside service reports is the Fitch Service.  Fitch expect a slow down in consumer spending.  Look at BJ Markets who gave its earning report suggesting that outlook.  The look to the price action of Costco Markets.  Add the price action and comments of Ross Stores, Walmart who see the income  constraints on the American Consumer and the FED really MISSED THE BALL!

Tariffs have been absorbed partially or wholly by consumer giants, but how long can that last until the prices jump?  Stagflation?

A Tariff Dividend to the American public to match the Covid Dividend?  Trump has already mentioned that. Never underestimate what Congress will do.

If Secretary Bessent gets his 150 basis point cut it will help consumers. it will help corporate borrowing, and it could help parts of commercial real estate where refinancing is an issue.

It will hurt retires. for every 50 basis point cut in rates is about a $70 billion hit in retires interest income.  They cant re-enter the work force.  Their 60/40 spilt is bonds versus stocks will be their only sorce of how they make up lost income by selling assets.  They did not go back to work in 2001 and 2007.

The FED Economist and their Ivory Tower academic thought has now come face to face with the real world application.

Home builders are in Layoff Mode, nonresidential construction is on their knees. The only construction out there is Data Centers, Hospitals or other Health Care Facilities.  Housing is in trouble as there are not enough homes to support the return to the office trend.

Pressure is out there.  FHA delinquencies are on the rise. foreclosures in both residential housing and commercial multi family housing are on the rise. Student loans repayment is lagging.

Bank stress is the next layer to watch.  Banks are already rejecting loan applications.  The only answer for retires is to look at their biggest nest egg their home.  Will we see the Grey Avalanche so often spoke of as the retired Baby Boomer sells and down sizes?  Then look to Banks putting more into Loan Loss Reserves.

Germany is in a recession, other countries are trying to support their economies by paying the US for tariffs and investing in their plants in the US.  The dollar is strong and it will affect the cost of goods brought into the US.  It will affect the cost of Goods sold by the US.  

Data Dependent and Economic Ivory Tower Thought is and has been an issue Americans have paid the price for.  How will it end this time?

When residential housing markets and stock markets are at All Time Highs, how do you ride this wave out?  It all depends on How Old Are You?  Retired? 70-80 years old, you don't have much time to ride this wave out!  Best to Pull Out and build a cushion to last your final days out.  30-40 or something build cash wait for opportunities.  You have time,

Gary McKae
Commercial Real Estate Advisor | Investor Advocate | Author
📍 McKae Properties, Inc.
📧 gary@pacwestcre.com
🌐 www.mckaeproperties.com
📞 (650) 743-7249
📍 2044 Union Street, San Francisco, CA 94123
DRE# 01452438

📌 Want to know how this affects your portfolio or property plans?
📅 Schedule a consultation or visit www.mckaeproperties.com for market update