Pacific West CRE Briefing Market Intelligence & Strategic Insight from Gary McKae

I’m a Commercial Real Estate Advisor and Broker Associate with decades of experience guiding investors, property owners, and institutions through complex real estate decisions. My background spans investment banking, portfolio strategy, and high-value real estate transactions—including REO, TICs, foreclosures, and structured deals across California and beyond. I specialize in helping clients navigate market shifts with clarity and strategy.

Post Pandemic Migration

Reverse Migration Is Real—And It’s Reshaping California's Real Estate Landscape
A recent article claiming that the nation’s largest office landlords are seeing post-pandemic highs in leasing activity struck a nerve. A bell went off. That headline may hold the key to understanding the shifting tides in California’s real estate markets—especially the Central Valley and Sacramento corridor.

The Why Behind the Inventory Surge

The flood of new listings in these areas—both residential and commercial—is no accident. Platforms like Crexi and CoStar are saturated with gross and triple-net lease properties. Residential markets are softening, with listing prices dropping and sale-to-list ratios declining. Meanwhile, on the San Francisco Peninsula—aka Silicon Valley—home prices and rental rates are climbing again.
Why? Because the pandemic is effectively over. Covid prevention measures are common, serious cases are rare, and treatments are available. With that, Silicon Valley employers are calling their teams back to the office. It’s either return—or find another job.

The Great Reversal

The “pandemic migration” out of the Bay Area into lower-cost regions like Sacramento, Modesto, and beyond promised a lifestyle of affordable homes, recreational access, and remote work flexibility. But the tradeoff? Summers with 100+ degree heat from May through October, cultural and political shock for many, and an unexpected impact on their children’s education and values.
Now, many of those workers are making the reverse migration—coming back to the Peninsula, paying up for homes, and competing in a reinvigorated market. Those who bought in the outlying areas are either stuck waiting for a price that may never return or commuting up to 6–7 hours a day.

The belief that remote work would be permanent is fading fast.

Data Points That Back It Up

Just look at the headlines:

“5 Types of Homes Expected to Plummet by the End of 2025”

“Redfin: 500,000 More Homes for Sale Than Buyers”

“Sellers Need To Wake Up—This Is Not 2021”

“Inventory Piling Up in California”

“Downturn Forecasted in 60% of Counties” (Newsweek)

These aren’t just headlines—they’re signs of a market correction already in motion.

Commercial Real Estate Is Shifting, Too

This isn’t limited to residential. I recently reviewed a listing for a collision repair facility in Modesto—one of the largest collision chains in North America had invested in a full remodel and signed a long-term lease. But nine months later, it’s still for sale at a 7.25% cap. Why? Fewer cars = fewer accidents. Reverse migration means fewer customers.

I was also paid for a Broker Price Opinion on a small strip mall with four units. What I found was eye-opening. While many strip malls in Central California remain vacant or are for sale, not a single one in the Peninsula—east of Highway 101 in this case—was unoccupied or available for purchase. Recent comps show strong cap rates (6%), low days on market, and quick sales—particularly in affluent areas.

Peninsula Retail: Low Vacancy, Steady Demand

The Menlo Park retail submarket provides a snapshot of the strength in Peninsula commercial real estate. As of Q2 2025:

Vacancy rate: 4.2%, compared to a 5-year average of 2.9% and a 10-year average of 2.4%.
Net absorption: -36,000 SF over the past 12 months, with no new space delivered.
Available inventory: 83,000 SF, an availability rate of 4.5%.
Total inventory: Approximately 1.8 million SF.
New construction: 0 SF currently under construction, well below the 10-year average of 10,000 SF.
Market rent: $49.00/SF, with annual rent growth of 0.6%—slightly below the 5-year average (1.0%) and 10-year average (2.3%).

Across retail asset types:

Neighborhood centers: +4.0%
Power centers: +3.7%
Strip centers: -0.2%
General retail: -0.9%

This data underscores the resilience and scarcity-driven strength of Peninsula retail. In contrast to the high vacancies and soft pricing in the Central Valley and Sacramento, core markets like Menlo Park are commanding premium rents and maintaining occupancy stability.

Multi-Family and Office Space: Strengthening in Core Markets

Cap rates on multi-family assets in the Peninsula have compressed from the mid-5% range to the mid-4% range. Inventory is down from 2023 and mid-2024 levels. Even in San Francisco, activity is rebounding, especially in premier neighborhoods like Pacific Heights and Presidio Heights, where mid-4% cap rates are being accepted.

Office space—once written off—is being quietly scooped up by REITs and institutional investors, anticipating a return to pre-pandemic leasing strength. They’re betting that this rebound is real. I believe they’re right.

My Advice: Move Now

If you own residential or investment real estate in the Central Valley or Sacramento corridor, sell now. Don’t wait for the market to improve—because it likely won’t. Even if you sell at a higher cap rate and reinvest in a lower one, you can make up the difference with appreciation and rental growth in stronger markets like the Peninsula and San Francisco.

Investor Takeaway

The market has changed—and it’s not going back to 2020.
Real estate fundamentals—not emotional expectations—should drive decisions today.

If you’re holding residential or commercial property in high-inventory areas like the Central Valley or Sacramento, this is your signal: consider selling while demand still exists. Stronger, more resilient markets like the San Francisco Peninsula are seeing renewed growth, tighter supply, and long-term opportunity.

Smart investors adapt early. The reverse migration is real—those who act now stand to benefit the most..

👉 Book a 15-Minute Commercial Real Estate Consultation
📅 Schedule Your Call

U.S. Treasury Posts a Historic Surplus

With $258 Billion in the Black, U.S. Treasury Posts Historic Surplus

Experts Say It May Signal Brighter Days Ahead

As I read the often dismal analysis in the media, I was reminded of a quote from the Friday, May 23, 2025 edition of The Wall Street Journal, Opinion Section (page A13):

“Making predictions is hard to do, especially about the future.”
—Supposedly from Yogi Berra

Despite the media’s gloom, a striking report caught my eye—shared by The Economic Times (India) via Yahoo News—stating that the U.S. government posted the second-highest monthly budget surplus in history, recording a $258.4 billion surplus in April 2025. This trails only April 2022’s surplus of $308.2 billion.

Key Drivers of the Surplus

This marked the first monthly surplus of fiscal year 2025 (which began in October 2024), largely attributed to an influx of individual tax payments, as April is the deadline for filing final taxes and the first quarterly estimated payments for many individuals and businesses.

Additionally, customs duties—boosted by President Trump’s tariffs—contributed $15.6 billion, more than double April 2024’s $6.3 billion. While still a modest slice of the total, it’s a noteworthy increase.

While it’s too early to predict consistent surpluses or long-term fiscal balance, this positive development is a welcome change from the negativity dominating U.S. news outlets.

Treasury Yields Rebound, Yield Curve Steepens

As of late May:

30-Year & 20-Year Treasury Yields are back above 5%

10-Year Yields exceed 4.5%

Mortgage Rates have climbed back over 7%

The six-month Treasury yield—often a reliable predictor of near-term rate changes—has ticked up by 20 basis points since early April and now aligns closely with the Effective Federal Funds Rate (EFFR). This uptick reflects the Fed’s continued "wait-and-see" approach, echoed by Federal Reserve officials in recent commentary.

A Closer Look at the Yield Curve

On May 23, 2025, the yield curve revealed a steepening at the long end, while the previous sag in the middle (between the 6-month and 7-year yields) has flattened:

Long-term yields (7 to 30 years) are now above short-term yields, effectively reversing the previous inversion.

This normalization—or “re-un-inversion,” as some traders call it—suggests increasing confidence in longer-term economic growth.

A Recession? Not So Fast.

To me, this is not a signal of an impending recession. In fact, bond traders and the bond market are often better indicators of economic direction than the sensationalist headlines of mainstream media. Bad news simply sells better.

We're still far from any reliable long-term forecasts, but Treasury Secretary Besset’s cautious and deliberate approach appears to be yielding results. His philosophy of “slow and steady” economic management aims to stabilize the U.S. economy while gradually improving budget surpluses and reducing deficits—something that appeals to both Wall Street and Main Street.

The Case for Lower Interest Rates

As the U.S. pushes for increased domestic manufacturing, lower interest rates are essential:

Lower federal borrowing costs—reducing the inflationary pressure of growing interest payments on national debt.

Lower financing costs for manufacturers—helping control the cost of goods sold, as manufacturing costs are embedded in all consumer products.

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The Art of a Deal, No Recession Forecasted

THE ART OF A DEAL... NO RECESSION FORECASTED?

When Donald Trump first jumped into the political scene, I bought his book The Art of the Deal on my Kindle. I found it interesting reading—even if I had jaded opinions about who Donald Trump was and his real estate background. I go back to it from time to time for a better idea of how the man operates. As I read his exploits, I find him a rather fair fellow compared to some real estate investors and builders I’ve known.

Watching his public actions over the years, it’s clear that his comments are part of a lifelong pattern of deal-making. Unfortunately, his critics and the media seem more focused on attacking him than understanding how he operates. But that’s politics—something I know all too well.

As in most investments, I’ve often said: wait—don’t make knee-jerk decisions based on current events. Long-term results rarely reward short-term reactions.

During the Trump presidency, I advised long-term investors to build cash and reallocate capital into real estate—not back into the stock market. That advice was later validated by a Wall Street Journal article analyzing investor performance from “Liberation Day” (the announcement of tariffs) through the various resolution periods. Investors who panicked and sold lost out.

We’re in an Adjustment Phase

This realignment of capital has historical precedent. We are entering a phase where the U.S. government will exert less influence over economic direction. Agencies like the DOGE (Department of Government Efficiency) have made strides in reviewing—and eliminating—wasteful spending. A recent 60 Minutes segment revealed how rogue foreign entities have infiltrated government programs, resulting in trillions of U.S. taxpayer dollars lost overseas.

As analysts and media jumped to conclusions based on fragmented data, the markets reacted wildly. But let’s look at some facts:

As of May 13, 2025, U.S. inflation dropped to 2.3%, the lowest since February 2021.
That figure was below estimates and contradicted fears that tariffs would spark stagflation.

What is Stagflation?

Stagflation combines inflation with economic stagnation. But current forecasts of a recession are declining. In fact, Wall Street banks are now projecting positive growth—not two quarters of contraction, which define a recession.

Investors Crave Stability

Investors prefer steady, predictable growth. This economic backdrop encourages conservative investors to trim risky positions and focus on long-term, income-generating assets.

The Federal Reserve, faced with mixed signals, appears to be holding interest rates steady—“sitting on their hands,” as has often been the case since the 1970s. The Fed rarely leads; it follows. Until there is executive action to reshape its economic philosophy, we’re unlikely to see bold changes.

Meanwhile, real estate investors are positioned to profit.

Why Real Estate Shines Now

The reduced likelihood of a recession is the most promising sign for real estate allocation—especially for Triple Net (NNN) Leases.

In a downturn, businesses may close, leases terminate, and owners are left with expenses and no income. But in a stable economy, NNN tenants pay rent plus property taxes, insurance, and maintenance. That leaves the owner with a true net return.

But Choose Carefully

Not all NNN assets are created equal. Some sectors, such as bank branches and pharmacy locations, are under liquidation pressure due to corporate restructuring. This opens opportunities for investors—but also requires diligence. You don’t need inside corporate intel to recognize a bargain, but you do need solid underwriting.

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Time to Pull Risk Chips Off the Table and Wait for New Dealer

When the Dealer is Hot, You Leave the Table

Today’s Stock Market Feels the Same

If you’ve ever played Blackjack, you know: when the dealer keeps pulling 21, it’s time to pick up your chips and move to another table.
That’s exactly where we are in today’s stock market.

Good news is scarce—and when it does appear, rallies turn into selling opportunities. Investors are asking the critical question:

Where should you move your chips now?

Gold is selling off.
Crypto is stuck.
Neither pays dividends or interest.
Treasury Bills and Notes offer 4.3% yields (1–3 month maturities).

The Federal Reserve has signaled no immediate rate cuts. Stability is elusive.

Meanwhile, traditional hurdles are growing:

Mortgage rates remain in the mid-6% range.
Insurance costs continue to climb.
Job security is wavering—even government and Silicon Valley jobs are at risk.

Home listings are rising. Cancelled and expired listings are mounting.
Even fix-and-flip investors are getting cautious, bidding low to protect against rising holding costs.

Where Smart Money is Moving: Multi-Family Real Estate

Today’s investors are aggressively shifting into Commercial Multi-Family Housing—and it’s easy to see why:

Rental markets are strong: Renting is safer than buying today.
Demand is accelerating: Last week I identified 14 potential 5–15 unit properties for an investor. By Thursday, only two remained—under contract.
Stable returns: Multi-family income outperforms Treasuries with upside potential and tax shelter.

Sample Yields:

Peninsula properties: Net Operating Income (NOI) averages 4.5%.
San Francisco: NOI ranges between 5.5%–5.8% in desirable neighborhoods.

These yields match or exceed Treasury Bills and offer appreciation upside—something T-Bills simply can’t.

Why Other Commercial Assets Are Struggling:

Bank branches, fast food outlets, pharmacies: Increasing closures leave property owners with empty buildings and no cash flow.
Office buildings: Flooding the market, with many being converted into low-income housing projects.

In contrast, Multi-Family Housing remains a safe harbor for investors.

The Economic Backdrop is Clear:

GDP Q1 2025: -0.3% decline (expected +0.4%).
PCE Inflation: 3.7% (up sharply from 2.4%).
Jobs Report: 177,000 new jobs vs. 133,000 expected.

A second consecutive negative GDP will confirm a recession.
Inflation pressures make rate cuts unlikely—despite what media chatter may suggest.

Smart investors ignore media noise and focus on fundamentals.

Summary:

Income-Producing Real Estate is the Safe Option Right Now.

Recent PacWest CRE Listing (SOLD)

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"Why Bear Markets Are Real Estate Buy Signals"

Bear Markets Are Real Estate Buy Signals

Stocks. Bonds. Real Estate. Gold. Commodities. Crypto. These are all “asset classes,” each considered by investors to be a Store of Value. But here's a truth seasoned investors understand: in every market cycle, money flows to what’s working.

Think of asset classes like an orange. There’s only so much juice inside—12 ounces, let’s say. And investors must decide how to divide that juice into glasses:

Appreciation
Income
Liquidity
Safety
Tax Advantages

Choose stocks, for instance, and you’ll pour heavily into appreciation and liquidity. But you’ll likely sacrifice safety and predictable income—especially in a downturn. Want 100% safety? You’ll give up appreciation. Every investor has to make tradeoffs.

From Tulip Mania to Tech Meltdowns

The past decade’s bull market—much like others over the past 50 years—has been fueled by growth stocks: technology, energy, biotech. Each sector has taken its turn leading the market. Today, AI led the charge. And now, AI is leading the retreat.

Is it tariffs? Economic uncertainty? Overvaluation? It doesn’t matter. Stocks don’t grow to the sky. Trees don’t either. Eventually, investors panic, selling triggers more selling, and we officially enter…
The Bear Market.
The Recession Headlines.

And then? Investors seek shelter.
They rediscover real estate.

The Shift Begins

Stock options get exercised and liquidated.
Cash piles up.
Short-term interest rates soften slightly.
And then, residential real estate gets bought—fast.

Look at Silicon Valley today:

Los Altos

501 Cherry Ave: Listed $7.498M → Sold $9.017M
1235 Portland Ave: Listed $5.998M → Sold $6.2M
93 Sunkist Ln: Listed $4.3M → Sold $5.71M

Redwood City

1733 Kentucky St (Woodside Plaza): Listed $2.725M → Sold $3.175M
503 Iris St (Mt. Carmel): Listed $2.75M → Sold $3.01M
956 Stony Hill Rd: Listed $1.995M → Sold $2.415M

All in the last 18 days.

Panic in one asset class leads to a “pop” in another. In this case, homes—especially in places like Silicon Valley—serve as both shelter and store of value. They’re tangible. You live in them. You care for them. They offer tax advantages. They provide comfort, equity, and emotional security.

That’s four out of five glasses from our orange juice metaphor.

What Happens Next?

Eventually, investors sitting on cash get tired of waiting.
Rates begin to fall.
The stock market remains volatile.
Even crypto stumbles.

The search for income, stability, and appreciation brings up a new conversation—one about Commercial Real Estate.

It happens casually: a friend at golf, a coworker at lunch, a neighbor at dinner tells you about their investments:

An apartment complex
A car wash
A dental office
A gas station

And they’re not just holding. They’re collecting monthly cash flow, writing off depreciation, and watching values rise.

Suddenly, you realize…

You’re still holding NVIDIA or AMD, hoping to break even.

Maybe it’s time to stop waiting.
Maybe it’s time to look at Commercial Real Estate.

Because the professionals are already doing it—today.

👉 Book a 15-minute CRE consultation

MAN PLANS & GOD LAUGHS

When Chaos Hits, Real Estate Shines

There’s an old saying that comes to mind when markets unravel: “In chaos, money finds clarity.”
That’s one reason real estate investors sleep well at night.

Money flows to the best-performing asset. Yet ironically, the average investor rarely diversifies effectively to shield against volatility and loss.

Think of an asset like an orange. It has rind, pulp, and juice—each part serving a distinct purpose. Similarly, an asset may offer capital gains, income, security, or liquidity. A true asset is simply anything that acts as a store of value—be it stocks, bonds, precious metals, commodities, real estate, or even crypto.

Stocks Have Been On a Rollercoaster

The S&P 500 began its run in December 2019, peaked in September 2021, dipped to a low in June 2022, rose again to a new high in September 2024—and now, we’re seeing another decline. Investors have had their faith tested, especially in the last few weeks.

Still, the mantra persists: “It always comes back.”
But does it?

Look back over 50 years: The Dow Jones hit 1,000 in 1970, dropped below 500 during the 1973–74 recession, and didn't break out decisively until 1983. The beloved Nifty Fifty saw dramatic falls. Many companies vanished. The Dow 30 lineup changed. And the word “recession” sent shivers down Wall Street.

Real Estate: The Steady Performer

Meanwhile, real estate investors collected rent, added properties to their portfolios, and continued building wealth—especially those who avoided over-leveraging. Even during real estate “crises,” the conservatively-positioned prospered and acquired more assets at discounted prices.

Today is no different.

Wall Street is calling it a bear market. Analysts and hedge funds whisper “recession.” Banks are cautious. But real estate? It remains active.

Commercial leases continue. Financing is still available—typically 6% to 6.75% with 30% down. Residential homes are still drawing multiple bids in hot markets.

Stock market chaos often leads investors to rebalance portfolios.
Options are exercised. Shares are sold. Larger homes are purchased.
Institutional players adjust allocations. Everyone leans more conservative when plans go sideways.

And somewhere, God is laughing.

Real Estate Remains Your Real Asset.

Asset of the Week

5-Building Office Campus

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Vacancy: 3.91%
Cap Rate: 8% (all-cash offer)
Seller Financing: 50% down with 6% interest, 3-year note (7% Cap Rate)

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Being Played: The Old Art of Negotiation

“Being played” is an age-old art in negotiation. In real estate, it’s practically a script.

Agents use it to stir urgency and manipulate emotion:

“We have multiple offers coming in.”
“It looks like offers are over list.”
“Get your offer in by noon today.”

This is the classic playbook of listing agents trying to push buyers into action. Meanwhile, behind the scenes, more inventory is coming to market, list prices are being discounted, and many buyers are balking at inflated valuations.

The goal is simple: trap the opposing party into overcommitting. That’s what it means to get played.

Now Playing: Real Estate Tactics in International Relations

It appears that the real estate investor in the White House is applying his own version of this art—on the world stage.

There were rumors that Putin preferred Biden in the last election, viewing him as predictable. Not so with Trump. The current administration’s unpredictability seems to have caught many off guard.

Despite heavy rhetoric around tariffs, only China faces active penalties. Tariffs on Canada and Mexico have been repeatedly postponed to April 2, 2025. In response, both countries have made significant concessions—closing borders and in Mexico’s case, extraditing drug lords to the U.S.

Europe Arms Up, Markets Adjust

Meanwhile, Europe has expanded its defense spending by over €1 trillion, a significant geopolitical development.

Back at home, the stock market correction in high tech has been swift and deep. Even the Federal Reserve has stated that employment will be another deciding factor for rate cuts. The Fed has signaled two cuts this year, not through formal announcements—but through verbal cues from what some now call "the Realtor in Charge."

Real Estate Market: Shrugging Off the Noise

Despite media noise about tariffs and spending cuts, the real estate market is holding steady.

The bond market continues to price in rate cuts by mid-year. The yield curve no longer signals a recession, and investor confidence is returning—especially in multi-family housing and office buildings.

Bank of America recently declared, “Growth is better than people think.” Meanwhile, Hudson Bay Company quietly acquired Neiman Marcus’ flagship store in Union Square, signaling strong investor interest in prime retail.

Commercial Office: Comeback in Progress

New York’s office sector is showing early signs of revival. Demand from the tech sector has resulted in a staggering 86% increase in tenant space over the past year.

The Commercial Mortgage-Backed Securities (CMBS) market is also reviving. The latest offering includes 38% office-backed loans—a figure unheard of just a year ago.

Out West, San Francisco’s Transamerica Pyramid landed its largest lease since 2020:

123,000 square feet to global law firm Morgan Lewis,
Spanning seven floors,
Signed at a premium rate—clear evidence of resurgence in confidence.

Multi-Family Housing: The Market Star

No sector showcases the real estate rebound better than multi-family housing.

In Q1 2025, San Francisco and San Mateo County posted strong demand and rising absorption rates. Over the last four quarters, net absorption exceeded 2023 levels, culminating in 2,800 units absorbed in 2024.

Submarkets like Redwood City and downtown San Mateo led the way, with Mission Bay close behind.

What’s driving this?

Improved public safety and reduced homelessness,
A visible crackdown on drug activity and crime,
A renewed sense of urban livability.

The result? Businesses, workers, tourists, and residents are returning—especially in San Francisco, where the booming AI sector is fueling capital investment, job growth, and new leasing activity.

Looking Ahead: Rent Growth and Appreciation Potential

Population growth is back. The economy is stabilizing. And yet, Bay Area rent growth of 1.6% still trails the national average of 3.1%—creating a strong opportunity for future upside.

Add to that the Fed’s projected rate cuts, and you have the recipe for:

Lower mortgage rates,
Reduced ownership costs,
Increased investor demand,
Higher rental income potential.

While media chatter warns of recession and markets swing, smart investors are shifting capital into multi-family.

With limited new development and tight supply, the fundamentals point to strong long-term returns.

Institutional Money Returns

We’re also seeing the return of institutional buyers—a clear market signal.

While large trophy assets are grabbing headlines, most transactions are happening in the 6–12 unit range.

Current cap rates: ~5.6%
Compared to 4.1% during the 2020–2022 boom

That means higher returns for new investors—and a correction in values that has created more realistic buying conditions.

In Closing: The Bay Area Advantage

The San Francisco Bay Area continues to be a global leader in innovation, investment, and technology. It’s home to the world’s fastest-growing companies and the highest household income growth in the nation.

Increased investment in AI over the past year has likely planted the seeds for the Bay Area’s next growth cycle.

This will lift not only the office sector but also residential, retail, and multi-family—making the next few quarters crucial for savvy investors.