The 2026 Transition: A Fiduciary’s Perspective on Market Liquidity and AI Displacement

The Steady Hand: Navigating the 2026 Capital Transition

By Gary P. McKae, CIMA®

If you notice a change in the direction of this newsletter, it is purposeful. As I transition McKae Properties into McKae Capital Management, Inc., my focus has shifted from property transactions to the broader stewardship of multi-asset portfolios and fiduciary oversight.

As we move into 2026, the investor market is clarifying enough to begin making critical strategy decisions, rebalancing portfolios, and reviewing complex debt structures.

The Macro View: A Consumer Mixed Bag

The current landscape reveals a stark divide. While government data shows a lack of vigorous consumer confidence, corporate profits suggest that the consumer remains active when affordability is prioritized.

The Real Estate Liquidity Trap: Current reports on owning vs. renting indicate a stagnant sales market. We are seeing a significant "buoyancy" in the rental sector, but for the wrong reasons. Many new rentals were once single-family residences with no prior rental history. This is a dangerous indicator: owners who cannot achieve their desired exit price are choosing to rent instead.

In my 50 years of navigating market cycles, I have seen this before. It is the real estate equivalent of an unexecuted limit order in the stock market. When "Limit Orders" remain above market value, action is frozen until panic hits. Real estate lacks the liquidity of equities; price cuts are often delayed until fear drives a "bottom spike."

Commercial Reckoning and the California Climate

In the commercial sector, owners are facing a "perfect storm" of leverage issues and deferred maintenance. Mortgages that were not wisely structured—specifically those with adjustable rates—are now working against the borrower.

In California, these issues are compounded by a legislative environment that increasingly favors renters over owners. Eviction is no longer a simple solution; it is a significant legal expense that depletes Net Operating Income (NOI). For those in the Triple Net market, the risks are now tied to corporate volatility. We see this with Rite Aid—bankruptcy hits, and the property owner is left with a vacant building and a vanishing income stream.

The AI Shift and the Global Transition

Artificial Intelligence is no longer a future threat; it is currently hitting junior and middle management. This structural shift is forcing a long look at career retraining or relocation. This directly affects residential markets where home prices were overstretched.

The U.S. economy is in a profound transition. We have historically supported a "social paradise" fed by an ever-increasing income from technologically oriented taxpayers. As that "food source" shifts due to AI and debt pressure, drastic measures will be required for capital preservation.

The "Steady Hand" Perspective

On the positive side, the stock and bond markets offer significant opportunities for those who can distinguish between market noise and systemic risk. A market of positive returns and declining bond coupons favors value increases, but speculation will create extreme volatility.  In my five decades of navigating capital cycles, the current divergence between US Debt and technological displacement is unprecedented

This volatility will thin the ranks, leaving a professional core of investors and advisors who understand how to prosper in uncertainty. As a Wharton-educated CIMA® and former Mayor, I believe that "Perspective" is the most valuable asset an advisor can provide.

The "Steady Hand" Philosophy:

"I consider age not a marker of retirement, but a marker of Judgment. Having managed capital through the 1974 recession, the 1987 crash, the 2000 tech bubble, and the 2008 financial crisis, I provide the perspective that ultra-high-net-worth families require to stabilize and grow their legacy".

I look forward to hearing your thoughts on this new direction.

Gary P. McKae, CIMA® Senior Investment Strategist | Fiduciary Leader | Former Mayor of Woodside 

📍 McKae Capital Management, Inc. 📧 gmkae@sbcglobal.net 📞 (650) 743-7249 🏢 655 Oak Grove Ave. #1346, Menlo Park, CA 94025 DRE# 01452438

2026 A Year of Chaos or Change?

2026 Market Outlook: From Macro Volatility to Real Estate Reality

From the capture of a Head of State to the potential indictment of a Federal Reserve Chairman, we have started 2026 with a "BOOM." While the headlines are loud, the numbers in the real estate sector tell an even deeper story.

Commercial Real Estate: The Bay Area Reset Commercial Real Estate in the SF Bay Area continues to face headwinds. Cap rates are trending upward as valuations adjust to a new reality. Notably, a major tech campus recently traded for 33.7% less than its purchase price a decade ago. We are seeing a shift in the retail landscape as well: while bank branches close, national giants like Costco and Walmart are impacting local pharmacies and "Mom & Pop" shops. The transition from "Rent" to "For Lease" signs in storefronts remains slow but steady. Interestingly, cap rates have increased from early 2025 into 2026, even as Fed Funds rates have begun to decline.

The Residential Affordability Crisis Nationwide, 75% of homes currently on the market are unaffordable to the typical American household. Prices remain 50% higher than pre-pandemic (2020) levels. In coastal hubs like New York, Los Angeles, Miami, San Francisco, San Diego, and San Jose, the situation is even more dire. According to Zillow, even a 0% mortgage rate would not be enough to make a median home affordable in these markets.

The California Exodus & Policy Shifts California’s recent rent control expansions are intended to protect renters, but they are increasingly viewed as a deterrent for landlords. Consequently, cap rates on multi-family assets are rising as investors look out-of-state for friendlier environments.

As Sean Roberts, CEO of Villa, recently told Fortune:

“We see the housing market remaining relatively stuck... until we see income growth rapidly accelerate, mortgage rates decline materially, or home prices come down—all of which remain unlikely.”

Furthermore, President Trump has proposed legislation to ban corporate ownership of single-family homes, adding another layer of uncertainty to the market.

The Strategy: What to do? At some point, prices must yield to the sheer weight of negative sentiment. We are already seeing a correction in the residential sector, with weekly price cuts becoming the norm—not just in California, but in "evacuation states" like Florida, North Carolina, Nevada, and Arizona.

For many families, renting is now more financially viable than the combined costs of a mortgage, property taxes, and maintenance. In California, a new proposal for a 5% tax on billionaires threatens to further drive out the primary sources of jobs and investment.

The Bottom Line: Whether you are a home buyer or a commercial investor, the strategy is clear:

1. Sellers: Accept realistic offers and move on.

2. Buyers: Make aggressive offers below list price to achieve acceptable cap rates or affordable monthly payments.

Expect a slow market for the remainder of 2026. Be diligent, keep analyzing deals, and stay ready. Opportunity will knock.

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.

Happy New Year

Looking Back at 2025 — A Framework for 2026

Before forecasting 2026, it is important to once again review 2025. The year revealed several formations that now shape expectations for the U.S. economy and the real estate markets heading into 2026.

2025 was a year of price adjustments. Both residential and commercial real estate markets across the United States experienced price reductions. In the Bay Area—and California more broadly—residential pricing softened while cap rates in commercial real estate began to rise.

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Commercial Real Estate: The First Indicator of Change

Commercial real estate was the first sector to signal shifting conditions. Banks, pharmacies, and consumer-facing businesses experienced declining demand. As mobile and online banking took hold, financial institutions closed branches or limited the use of brick-and-mortar facilities. Some properties returned to the market with high cap rates, often supported by continued rent payments from parent banks. Others, however, were leased to management companies rather than the parent institutions—many of which have since filed bankruptcy—leaving property owners to salvage value and find replacement tenants.

As this inventory grows, competition among sellers increases. The result has been higher cap rates, whether actual or pro forma, across many commercial asset classes.

The most significant drivers of change appear to be shifts in U.S. government spending, combined with rapid advances in technology and artificial intelligence.

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The Rise of the “Grave Dancer” Buyer

As triple-net (NNN) inventory expands, cap rates are rising accordingly. This environment favors a specialized buyer—often referred to as a “grave dancer”—who acquires distressed or vacated NNN properties and repositions them to meet current market demand.

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Housing Demand & Employment Pressure

Demand within commercial real estate has remained strongest in multifamily housing. High home prices, limited inventory, and elevated interest rates kept many potential buyers sidelined in 2025. Added to this was growing concern over job security.

Large layoffs within the government sector created ripple effects throughout the economy. Social service agencies faced budget reductions or closures, forcing many workers to reassess their careers. The common outcomes were selling, downsizing, or attempting retraining—often leading to financial stress and, eventually, foreclosure.

Foreclosures are rising, both nationally and within parts of the Bay Area. To avoid foreclosure, homeowners must sell, relocate, or secure new employment—none of which are easy options for middle management or technology workers. The result has been lower listing prices and increased rental demand.

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The Shift Toward Rentals & Corporate Ownership

For those unwilling or unable to purchase homes, the alternative has been multifamily housing or single-family rentals.

In California, single-family rentals have undergone significant change. Legislative measures increasingly favor tenant protections while placing heavier burdens on landlords. Individual “mom-and-pop” owners—long dominant in this segment—have been hit the hardest. Over time, this has accelerated the transition toward corporate ownership, as institutional operators are better equipped to navigate regulatory complexity.

Expect continued corporate consolidation of single-family rentals and further downward pressure on residential pricing, as previously described.

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Multifamily: Strong, But Not Immune

Multifamily housing should have remained strong in 2025—but it did not escape disruption. Cap rates began to reflect population shifts that originated during COVID. San Francisco experienced one of the most dramatic population declines as work-from-home policies allowed residents to relocate. Surrounding regions, including Sacramento, Tahoe, and even Hawaii, benefited from this migration.

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2026: Early Signals & Structural Change

In 2026, political and economic shifts are becoming more visible. Several liberal cities have seen a return to more moderate or centrist governance—most notably San Francisco.

In the San Mateo County, cap rates on multifamily properties have begun to rise gradually. In contrast, San Francisco has seen cap rates decline as residents return for new employment opportunities and improved access to services. Among these, medical care availability remains one of the most critical drivers—particularly for aging populations and families requiring specialized care.

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What to Expect in 2026

Looking ahead, expect:

• Continued reductions in government spending

• Fewer middle-management technology jobs as AI replaces traditional roles

• Ongoing closures of small “mom-and-pop” businesses and empty storefronts

• A lag as the economies of scale adjust

• Adjust investment portfolios to the new normal

📘 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.

Year-end Commentary

Thanksgiving is behind us, Christmas is ahead and the comments of a Rate cuts remains divided.  Whatever happens in the next two weeks on the rate cut may end up being a disappointment.  The last rate cut did not see the equal drop in the 10 and 30 year bond.  It saw a slight increase as inflation still remains a question.

The overall investment market appears divided.  Whether it is the bond Market, the Stock Market or the Real Estate Market; one cannot get a majority consensus opinion.  

In the San Francisco Peninsula the ultra luxury high end properties are seeing an exit of owners that are allowing large price cuts after 30 days on the market.  San Francisco is not as badly hit as the Towns of Woodside, Atherton and Portola Valley, they just are not sheltered from the lack of optimistic buyers.

The layoffs of Silicon Valley have not be advertised much when it comes to packing bags and moving on to greener pastures.  That may come later, a frustration that could indicate a point of purchase.  Until then, keep one's powder dry appears to be the "Buyer's Attitude"

Across the nation the residential market is seeing price cuts which could be attributed to political agenda's of the media or actual fact.  The buyer beware should be the model until some clear cut indications of our economy is clear.  So far there is the same division of parties and supporter's of the opinions of where we will be December 31, 2026.

In the commercial venue there are some good and cautious attitudes.  Rents on multifamily are slowly rising without too much objections from the renter.  That is good news for the Multi Family owners.  One can see that in the limited listings in the SF Peninsula with Cap Rates in the 5% or lower range is common in the San Francisco Market too.  

Storage properties remain strong, a clear indication that many of the renters are putting belongings n storage waiting for a buying opportunity.  

Car Washes are also quite strong and ironically during winter they will see an increase in income as the desire to "wash your own car in winter" gives way to the local car wash.

Retail is seeing continual weakness as the concern of a recession or slight weakness in the economy; along with a weak consumer confidence index.  Banks, Drugs Stores are seeing the continuance of closings; as Amazon, Costco and Target hammer on prices competition; as well as, On-Line Banking and the use of curbside tellers.  This leaves many owners worrying about the lease termination and how to address an empty property with a limited amount of time income but no occupant.

The bright star in the San Francisco area is San Francisco itself.   A new mayor, a cleaning up of the streets of squatters and beggars along with a strong sense of safety has brought back many Corporate and Startup businesses.  The City has a sense and feel as it did some 20 plus years ago.  Now nothing like vested suits and high heals of the 80's, but a feel that makes a visitor, occupant and worker feel comfortable.

The year end comes down to Interest Rates, the Economy, and employment.  the last final comment is Employment.

Silicon Valley is thinning middle management and programers (?).  Artificial intelligence is a cheaper and more efficient replacement owing to the layoffs, but only time will tell if it is or will be efficient.  So far from my use of AI, I feel it has done the work of several employees and legal council.  Based on my reviews and my use, I say there will be a major change in the Employment numbers going forward.  Then too, there is the migration out of the State of California as employment, the cost of living and the increasing cost of home ownership increases without abatement.

The last figure I saw was that California had a 5000,000 net loss of citizens.  Well and good when one fails to consider the large estimated amount (+ 1,000,000) of legal/illegal immigrants who have offset the migration out of the state.  One must consider weather loosing a mid level manager or a highly trained technician with substantially higher incomes is a good offset of tax dollars for the gain of a laborer?  Is it a positive in the State Coffers when the taxes collected from high income migration out is worth the cost of care for the migration in until they become positive contributors to the Sate of California?  Time will tell and ow many tax payers will have the fortitude to wait to see?

From and investment side it may be wise to invest when there is a secure cap rate and a secure lease before the Commercial Real Estate Investor make their next move, or just hold the cash in 4%+ government short term debt. Crisis and fear are always the best buying opportunities. whether it be stocks, bonds, commodities or real estate.  Caveat Emptor.

📘 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.

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.