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

Negative Thoughts

Spotting Clouds in a Carefree Market

Reflections on Cycles, Risks, and Real Assets

The Weekend Issue of the Wall Street Journal, August 16, 2025, ran an article titled “Spotting Clouds in a Carefree Market.” While the piece focused on the stock market, it stirred memories of my early years as an investor in the late 1960s and 1970s—when cycles, risks, and opportunities looked very different from what investors see today.

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Looking Back: Lessons from the 1970s

In late 1969, the Dow Jones hit 1,000 twice, only to fall to around 450 by 1974. Stock prices tumbled from triple digits into the single digits. Inflation was roaring. Gold, though technically illegal for Americans to own, became the go-to store of value. Certificates of Deposit and fixed annuities were the only safe investments that brokerages could offer.

In the mid-70s through early 1980s, stock rallies were capped by a ceiling that wouldn’t break until 1982. Interest rates had climbed to over 14%, but in 1982, they finally came down. During that period of high volatility, investors scrambled to protect their investments. Real estate emerged as the only trusted store of value. Banks and savings & loans, overwhelmed by foreclosures and REO (Real Estate Owned) properties, unloaded assets at fire-sale prices. For investors like me, it was an opportunity to buy at significant discounts—like a kid in a candy store.

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Clouds on Today’s Horizon

Fast-forward to today, and the clouds are gathering again. While the current market seems “carefree,” history shows that these times often precede a reckoning. Here’s what’s currently on my radar:

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Economic Outlook

• Tariffs: While tariff hikes haven’t yet sparked inflation, they remain a wild card. Traders are expecting the Fed to cut rates in September, but inflation isn’t subsiding quickly enough to guarantee a smooth path forward.

• Job Market: Silicon Valley’s unemployment rate has now surpassed 5%, a worrying trend. We need growth and low unemployment to support the cost of living and residential housing costs in the region. While stagflationremains a risk, a slowdown in earnings forecasts could drag down job creation and further hurt consumer confidence.

• Stock Market: The S&P 500’s performance has been heavily skewed by just three sectors—Tech, Communication Services, and Financials. These sectors include companies like Meta and Alphabet. However, Alphabet has been ordered to divest itself of Chrome, a key business segment. The rest of the market is not looking as strong, with energy, materials, healthcare, and consumer staples all downgrading. What’s keeping the market afloat? AI and data center construction—but that’s a shaky foundation for long-term growth.

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Market Valuations

PE ratios have climbed to 22.5, the highest since 1985—levels that preceded the 1987 crash and the dot-com bubble. High PE ratios are not necessarily bad for short-term performance, but they signal trouble for long-term value when expectations fall short. Investors are expecting the best of all worlds—strong growth and innovation, but these hopes may be unrealistic in an environment where data points are manipulated or skewed.

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Politics and Its Impact

The current political climate may present further challenges. Tariffs aren’t having as negative an impact as some expected, but political rhetoric and attacks on the Bureau of Labor Statistics (BLS) and the Federal Reserve (Fed) could have international ramifications. While domestic policies may not shift much, global markets could respond differently, adding to uncertainty in the coming months.

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Commercial Real Estate: A Mixed Bag

Despite optimism in some sectors, commercial real estate (CRE) is not out of the woods yet. There are a few signs of market changes to watch closely:

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Office Market

The office market in Silicon Valley is struggling. Many large companies are still downsizing their office footprints as remote work continues to be popular. This trend has yet to fully stabilize, and while some new leases are being signed, the overall market remains under pressure.

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Multifamily Housing

On the positive side, multifamily housing remains resilient. San Francisco’s multifamily market is seeing higher demand than in previous years, particularly as businesses related to the growing AI sector drive economic recovery. However, even this segment has challenges, with rents in some areas still rising despite overall economic caution.

• The San Mateo/Burlingame area, for instance, has seen an increase in rents, driven by new construction and a stable demographic of renters who commute between San Francisco and San Jose. But, with vacancies still fluctuating, investors should approach with caution.

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Commercial Property Challenges

As for commercial properties, many from the COVID migration era are now facing maturing loans. Investors who purchased at inflated values now face higher interest rates and loan-to-value (LTV) ratios that no longer support refinancing. In particular, properties leased under Triple Net Leases (NNN) with prime tenants are seeing potential cash flow problems as tenants are unable to sustain their operations.

With rents rising in office spaces and vacancies dipping in some areas, there’s a risk that higher-cap-rate deals (7%-8% or more) will continue to stress the market. Some owners are already seeing Net Operating Income turn negative, which has led to foreclosures—a red flag for the industry.

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The Real Estate Investor’s Dilemma

Much like the 1970s, investors are finding themselves at a crossroads. Real estate remains a solid asset class, but the lack of liquidity in certain sectors and the growing challenges faced by tenants in Triple Net Lease properties are a concern. The challenge now is navigating these risks while capitalizing on opportunities in multifamily housing and strategically located properties.

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The Final Thought

As we look ahead, the question remains: What if? While there’s optimism in the air, it’s essential to approach the market with caution. The past has taught us that, while everything may seem fine in a carefree market, risks are always lurking in the clouds. Keeping an eye on real assets, navigating the shifting job market, and watching for signs of slowing consumer demand are key for anyone looking to thrive in these uncertain times.

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Conclusion: The Investor’s Outlook

As we saw in past decades, real estate continues to offer reliable returns—especially as AI-driven industries reshape how we think about long-term investments. But, just like the stock market, commercial real estate is cyclical, and those who can navigate the ebb and flow of economic trends, market cycles, and changing political landscapes will remain well-positioned for success.

For now, the clouds are still forming, and investors must be prepared for what comes next. Whether you’re looking at multifamily housing, office space, or tech-driven commercial real estate, the future holds both risks and opportunities.

Gary McKae
Commercial Real Estate Advisor | Investor Advocate | Author
📍 McKae Properties, Inc.
📧 gary@mckaeproperties.com
🌐 www.mckaeproperties.com
📞 (650) 743-7249
📍 655 Oak Grove Ave #1346, Menlo Park, CA 94026
DRE# 01452438

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

COWBOY LOGIC, GROWTH AND EMPLOYMENT

Cowboy Logic Meets the Modern Market: Are the Jobs Numbers Missing the Mark?

By Gary McKae | McKae Properties, Inc. | DRE# 01452438

Cowboy logic, in its simplest form, refers to a pragmatic and straightforward approach to problem-solving — making decisions based on common sense, life experience, and self-reliance. No frills, no overthinking — just calling things like they are.

And lately, cowboy logic has been telling me something doesn’t quite add up.

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AI Disruption Without Labor Fallout?

Artificial Intelligence has had a dramatic effect on labor across Silicon Valley. Many entry-level programmers have been replaced by AI. Law firms have trimmed support staff thanks to document automation. Countless other businesses are using AI to reduce overhead by automating administrative roles.

So, by cowboy logic, that should show up in the labor data — fewer support jobs, maybe a dip in the jobs report. But it didn’t… not until the August 1, 2025, revision.

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Immigration, Consumer Behavior, and Job Resilience

Another factor is immigration. ICE enforcement and shifting policies should have, in theory, tightened the labor supply — particularly among service and construction sectors. Yet again, there was no substantial change reflected in the employment data through the first half of 2025.

Consumer spending has been slowly declining since 2024. If people are buying less, common sense suggests fewer retail and service jobs would be needed. Still, the jobs reports remained strong.

And then there’s the “return to work” trend — employees leaving remote setups to return to pre-COVID workspaces. That has certainly revived activity in urban business districts and bolstered support staff needs in some service sectors. But this shift mainly involves geographic relocation, not true job creation.

The real sign of this movement is seen in rising rents and reduced vacancy in urban cores — not necessarily in labor market expansion.

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Bad Data? History Says It Happens

Statistics are only as good as the data behind them. And data can be wrong — or misinterpreted. Take the 1948 election: Thomas Dewey was forecasted to win by a landslide. The polls were wrong because they relied on telephone surveys, a luxury at the time. Affluent voters were overrepresented — the result? Harry Truman won. Bad data, bad predictions.

Today, we gather economic data from a wide variety of sources — but that doesn’t make it foolproof. We need to continually evaluate the assumptions behind the numbers.

If the Department of Labor failed to account for AI job displacement, immigration shifts, and consumer contraction until August, cowboy logic says we have a data interpretation problem. And that matters for real estate.

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How This Impacts Real Estate Markets

Let’s look at what the market is telling us — not just the headlines.

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Multifamily Housing: San Francisco & San Mateo/Burlingame

San Francisco's multifamily market has rebounded. Q1 2025 absorption hit the highest level since 2021. Population growth has resumed, crime is declining, and the city is stabilizing. That stability is fueling demand for apartments — and landlords are responding.

In San Mateo/Burlingame, a major apartment submarket with 22,000 units, rents have risen sharply. Much of the inventory is older Class B/C properties, which creates opportunities for value-add investments. Caltrain and bridge access add to the area’s desirability. New construction is being absorbed quickly — evidence of strong renter demand — even as vacancy rates hover at 5.1%, the lowest in a decade.

Key Trend: Multifamily is surging due to migration back into core markets, a tight construction pipeline, and stabilized urban appeal.

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Office Market: Still Sluggish, But Stabilizing

San Mateo has 10 million SF of office space. It’s home to major players like Sony Interactive and Roblox. Leasing activity is up — especially from AI firms — with new deals hitting levels not seen since 2022. But vacancy remains high, and rents are still 30% below pre-pandemic levels.

Key Trend: Office is in recovery mode, but cowboy logic says the AI hiring boom and return-to-work narrative aren’t enough to call this a full rebound.

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Hotel & Hospitality: Momentum, But Long Road Ahead

Hotel investment has picked up, with $159M in transaction volume in H1 2025 — a major increase over just $17.5M in the same period last year. But much of this activity stems from distressed sales and recovery plays. Labor contracts with higher wages and protections are squeezing profitability, and many insiders say pre-pandemic performance levels may not return until after 2030.

Key Trend: Hospitality is moving, but it’s fragile. It’s not driving labor strength — it’s still finding its footing.

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Conclusion: Trust the Market, Not Just the Models

Cowboy logic doesn’t deny the value of data — it just demands the data make sense.

If AI is cutting jobs…
If consumer spending is down…
If immigration is being restricted…
If office and hotel markets are still weak…
...then how do we explain booming jobs reports?

We don’t. Or at least not yet.

The market, not the headlines, tells the story. And for now, the story is mixed. Multifamily is strong, but office and hospitality still face headwinds. That’s not consistent with robust job creation across the board. As always, we must look beneath the surface, evaluate where the data comes from, and follow the real signals — not just the spreadsheets.

That’s cowboy logic.

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Gary McKae
Commercial Real Estate Advisor | Investor Advocate | Author
📍 McKae Properties, Inc.
📧 gary@mckaeproperties.com
🌐 www.mckaeproperties.com
📞 (650) 743-7249
📍 655 Oak Grove Ave #1346, Menlo Park, CA 94026
DRE# 01452438

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