"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.

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.

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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.

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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.

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Real Estate Remains Your Real Asset.

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Being Played: The Old Art of Negotiation

 

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.

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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.

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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."

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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.

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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.

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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.

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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.

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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.

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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.

Chaos, Opportunity, and the Real Estate Market in Transition

 

Chaos, Opportunity, and the Real Estate Market in Transition

Change Brings Chaos—And Opportunity

A change in management always creates chaos. New managers, new teams, and new management styles disrupt existing systems, affecting staff, clients, and customers. The same holds true for political administrations.

The Trump administration is not just another management change—it has the backing of the electorate. This shift brings both uncertainty and opportunities across various economic sectors.

Stock Market Reflects the Chaos

The stock market, a mirror of economic confidence, is responding with heightened volatility. When uncertainty looms, investors reevaluate their portfolios, leading to market fluctuations.

Among major asset classes, real estate remains a cornerstone of the American portfolio, from residential homes to commercial investments. However, current market conditions highlight the uncertainty in valuations, demand, and financing.

The Federal Reserve: Leaders or Followers?

Historically, the Federal Reserve provided stability and confidence to financial markets. However, today’s interest rate policy appears to be dictated by market forces rather than proactive decision-making. The Fed Governors have become followers, not leaders.

Instead, the bond market has taken the lead:

• 2-year Treasury yield: 4.00%
• 1-year Treasury yield: 4.06%
• 6-month Treasury yield: 4.25%
• 30-day Treasury yield: 4.30%

Bond market futures now anticipate three rate cuts by the end of the year.

Why Is There Optimism?

Despite market turmoil, several factors contribute to investor optimism:

• Lower borrowing by the U.S. Treasury
• Progress toward a balanced budget
• Continued economic activity

Residential Real Estate: A Market in Transition

The residential real estate market is seeing selective increases in inventory. Mortgage rates are declining, yet demand for housing remains subdued.

Notably, the luxury market is seeing an uptick in lease-option-to-buy contracts, as reported by the Wall Street Journal.

• Homebuyers are opting to rent, waiting for affordability to return.
• The rental market is booming—properties disappear almost as soon as they hit the market.
• Multi-family properties are seeing increased interest, with cap rates dropping and prices rising.

Commercial Real Estate: Shifting Investment Strategies

Investors are offloading Triple Net Lease (NNN) properties, including:

• CVS
• Walgreens
• Bank of America
• Rite Aid
• Small shopping centers
• Office buildings

Companies are closing underperforming locations as part of cost-cutting initiatives. For example, Joann has listed 800 leases for sale.

Chaos Creates Opportunity

For savvy investors, chaos breeds opportunity. Understanding the market’s shifts allows strategic decision-making.

• Residential real estate revolves around affordability.
• Commercial real estate depends on two key questions:
  1. Will the tenant continue to pay the lease?
  2. Will the property remain occupied?

Government Shakeups Affecting Real Estate

Federal staff reductions and property sales add another layer of complexity:

• 400 government properties are now up for sale.
• Office lease terminations under the Trump administration have already affected $1.43 billion in commercial mortgage-backed securities (CMBS) tied to 20 properties.

A Silver Lining: Office Market Stabilization

A positive sign amid the chaos: Government and corporate employees are returning to offices. This shift has led to stabilization in the office sector, sparking renewed investment interest.

While still in its early stages, demand for office properties is beginning to rise.

Investors Must Be Strategic

Before making investment decisions, investors should:

• Evaluate each property’s vacancy factor.
• Assess the potential for rent increases.
• Analyze the stability of tenants and lease agreements.

In major U.S. cities, net absorption rates are turning positive. Even Silicon Valley is slowly recovering, with offices reopening and commuter buses returning—though still below pre-pandemic levels.

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New California Real Estate Laws for 2025

California continues to roll out new laws impacting landlords and renters. Here’s a summary of key changes:

1. Rent Reporting (AB 2747)

• Landlords must offer tenants the option to report positive rental payments to credit bureaus.
• This applies to all new leases after April 1, 2025 and existing leases by April 1, 2025.
• Exemptions: Buildings with 15 or fewer units, unless corporately owned.
• Tenants opting in may be charged a fee up to $10/month.

2. Security Deposit & Fee Restrictions (SB 611)

• Tenants cannot be charged fees for rent payments by check or for certain notices like lease termination.
• Military servicemembers with extra security deposit charges for poor credit must be refunded within six months.

3. Security Deposits & Move-Out Deductions (AB 2801)

• Landlords must take photographic records of the unit before move-in and after move-out.
• Deposit deductions can only cover actual damages (not regular cleaning services).

4. Rent Caps for Affordable Housing (AB 846)

• Rent increases for state-subsidized housing are now capped at 5% plus CPI or 10%—whichever is lower.
• Goes into effect June 2025.

5. Domestic Violence Protections (SB 1051)

• Tenants can request lock changes for themselves, family, or household members affected by domestic violence.
• Landlords must pay for and complete lock changes within 24 hours or reimburse tenants who change them.

6. Eviction Process Changes (AB 2347)

• Tenants now have 10 days (up from 5) to respond to an eviction filing.
• Supporters say this helps prevent “default evictions” due to missed deadlines.
• Critics argue longer litigation times could increase tenant debt.

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Market Trends: What’s Next?

California’s single-family rental market continues to decline as landlords shift toward commercial properties.
Meanwhile, fix-and-flip investors are aggressively searching for distressed properties to capitalize on market shifts.

The Light at the End of the Tunnel

Despite uncertainty, economic activity is stabilizing, and the Federal Reserve may step in sooner than expected.

Current market expectations:

• The Fed is expected to cut interest rates by 25 basis points in March 2025.
• However, rising inflation risks from new tariffs and extended tax cuts could introduce stagflation concerns.

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Final Thoughts: Navigating the Chaos

Real estate investors must stay informed, strategic, and patient.

• Residential markets will continue shifting based on affordability.
• Commercial markets will see office sector stabilization and retail property challenges.
• The bond market, not the Fed, is now the true economic leader.

Those who study, plan, and adapt will thrive in this environment.

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What’s Next for You?

If you’re looking to navigate the changing real estate landscape, now is the time to act strategically.
Whether you’re a buyer, seller, or investor, opportunities are emerging from the chaos.

Bifurcation in Real Estate: A Market at a Crossroad

Bifurcation in Real Estate: A Market at a Crossroads

Bifurcation: A point at which something divides into two branches or parts.

Real estate is an asset class, and like all asset classes, it has distinct relationships and subdivisions. Each asset class is bifurcated based on type and composition.

In real estate, the two primary bifurcated classes are Commercial and Residential. Historically, the key factor linking these two asset types has been interest rates—which dictate both the cost of housing and the return on housing investments.

The Pre-Pandemic Relationship: Interest Rates as the Link

Prior to 2020, the residential real estate market followed a predictable formula:

• The cost of housing was largely determined by the yield curve, a benchmark created by investment banks to measure risk vs. maturity.
• The risk-free rate of return was set by the Federal Reserve System, influencing mortgage rates.
• Residential home values followed the classic “3L” principle: Location, Location, Location.

Everything functioned as expected—until the pandemic of 2020 disrupted this equilibrium.

Pandemic Shock: The Breaking of the Traditional Relationship

During COVID-19, the Federal Reserve slashed interest rates to near zero. This had two immediate effects:

1. Residential housing prices surged—low mortgage rates made homeownership cheaper, fueling demand and driving up prices.
2. The Commercial market weakened—as remote work became mainstream, many businesses abandoned office spaces, leading to lease cancellations and rising vacancies.

For the first time, the long-standing relationship between Commercial and Residential real estate came under strain.

• Residential buyers took advantage of lower mortgage rates and migrated to more affordable locations while working remotely.
• Commercial landlords struggled as office space demand plummeted. With lease cancellations rising, many property owners faced mortgage defaults.

Commercial vs. Residential: Two Paths in Distress

The structural differences between Commercial and Residential real estate became more apparent:

• Residential Foreclosure Process: A structured, standardized legal process exists for homeowners facing default.
• Commercial Properties & Bankruptcy Protection: Commercial owners, protected under Chapter 11 bankruptcy, often operate under LLC or LLP structures, allowing them to renegotiate loan terms rather than face immediate foreclosure.

This ability to delay liquidation has given commercial investors more flexibility in managing distressed properties—unlike homeowners, who are more exposed to financial hardship.

The Current Market: Stress Signals Emerging

As of early 2025, the bifurcation between Commercial and Residential markets is showing signs of stress:

• Residential Market:

  • Home affordability is under strain due to rising financing costs.
  • Inventory is increasing, leading to gradual price declines.
  • Insurance costs are becoming a major burden, especially for aging baby boomers looking to downsize.

• Commercial Market:

  • Capitalization rates (Cap Rates) are rising as property values adjust downward.
  • Investors are waiting for Cap Rates to hit a favorable level before making acquisitions.
  • Multifamily properties remain attractive, as renters have limited alternatives in the face of high home prices.

Cap Rate Formula:

$$\text{Cap Rate} = \frac{\text{Net Operating Income}}{\text{Property Price}}$$

(Example: $200,000 NOI ÷ $4,000,000 Property Price = 5% Cap Rate)

Multifamily as the Safe Haven

With affordability pressures keeping many renters in place, multifamily properties are the top target for commercial investors. As multifamily demand rises, service-oriented businesses such as retail centers, medical facilities, and pet care services tend to follow.

But this dynamic will shift once residential home prices drop—triggering broader market adjustments.

The Federal Reserve’s Next Move: A Pivotal Moment

Between July and September 2025, the Federal Reserve is expected to make a critical decision on interest rates. If inflation slows, rate cuts will follow, directly impacting:

• Residential Housing: Lower rates will improve affordability, stimulating homebuying activity.
• Commercial Real Estate: As financing costs ease, investors may return to office and retail assets.

Warren Buffett’s Signal: A Cautionary Note

Market cycles often provide early warning signs, and Warren Buffett’s recent strategy is worth noting:

• Buffett has increased his cash position to over 25%, signaling caution.
• He is buying short-term government bonds while reducing equity exposure.

This flight to safety suggests that smart money is bracing for further economic turbulence before committing capital to real estate.

The Takeaway: Navigating the Bifurcation in 2025

The real estate market remains in a delicate balance between residential affordability challenges and commercial market corrections. Savvy investors are waiting for the right entry points, while homeowners face increasing pressures from rising costs.

At Pacific West Advisory Group, we specialize in helping investors navigate these complex market shifts. As we continue to push beyond traditional industry standards, our goal remains to deliver innovative and strategic real estate advisory services.

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The Problems are the Path: Residential Inventory Building Commercial Real Estate Revival

It will remain to be seen in the upcoming months if the Trump Administration will help the residential housing industry by increasing inventory and improving affordability issues.  The Commercial Real Estate industry appears to rebonding from the depressed levels and excess inventory.

Returning back to the work place will put additional pressure on residential housing.  The potential from higher interest rates for a longer period could put pressure on price and more inventory could accumulate.  That would create some respite in prices and help affordability.

There may be one pressure point for increased sales of the Retired Baby Boomer residentials. INSURANCE, the increases in California insurance is nothing when compared to other states.  The San Jose Mercury News recently had an article on insurance increases in all 50 States.  California has lower percentage increase than Florida and Texas, and lower than most other states, except a few.  Will a retired Baby Boomer sell and move to another state for lower insurance prices, simply due to lower home prices?  

What about the first time home buyer, where do they move?  The best answer lies in the profits of builders.  This is the sector of housing that develops new housing projects.  All one has to do is open the weekend San Jose Mercury News and the section with Housing Developments from south of San Jose to the east up to and including Reno.  Projects are for sale. Projects with incentives for buyers as mortgage rate buydowns. price cuts, improvement packages.  While builder's profits are increasing, so is there inventory of homes for sale. Price cuts and special terms create sales.  This draws buyers from areas where prices a high and inventory is low.

That is not enough to increase inventory enough to get affordability into the picture.  Affordability will only happen with economic benefits.  So we are now looking at the Trump Administration to create a viable economy with the ability to make housing affordable.  The major factor in affordability is NOT PRICE!  The Major Factor in Affordability is the COST OF MONEY.....INTEREST RATES!  If Trump is able to lower interest rates it will not make any difference if the price of the home is $1.5 million or $2 million, $700,000 or $800,000.  What will make the difference is how much a month the buyer pays for the mortgage, property tax and insurance. 

If there is Motivation in the California State Legislature it will be in the Rental Market of Residential Housing.  At present there are many rules on how a landlord may treat a renter.  Unfortunately, there are many landlords who are ignorant of the laws and their ignorance creates violations.  What is lacking here is equal representation of a renter to a buyer in the disclosure process.  At present a landlord, agent or management company can tell the renter the house is ready to move in, while the buyer of a residential structure must be shown documented forms that the property IS READY TO MOVE INTO!

I believe if the rental market of residential homes is regulated like the sale of residential homes there will be an inventory of substandard homes in the housing market. Landlords reluctant to follow Full Disclosure Laws may take an option of selling the residential property and exchange the proceeds to commercial income property that is not residential through a 1031 tax free exchange.

When the State of California overhauls the rental market with the same standards of the residential full disclosure sale market the housing inventory for sale will increase.

Back to Interest Rates, the FED met January 28 and 29 on interest rates.  No change with the note that inflation remains high.  This is an indication we will see the present level of interest remaining the same for at least the next 3 months, in my opinion. The forecast is for two cuts in 2025 looks to be accurate.  Consumer confidence has declined in past two months which may put pressure on the FED to lower rates.  Then we have President Trump.

President Trump made it Very Clear at his Zoom Call in Davos Switzerland interest rates are too high and must come down on a world wide level.  The cuts in Federal Employment by him will have some affects on economic numbers.  The Census has already announced a slow down in manufacturing.  The Recent Report has some figures that do not bode well for the economy.  Manufacturing is down and so is economic activity. The recent sell off in the stock market will have the FED taking a steady attitude on interest rates.  

The Year Curve, or the rates on government bonds from short term to long term rates have a steady increased in rates from one year maturity onward.  That to me, that means rates will come down with in the year and be less than the 10 year bond yield.  The Ten-year bond is the maker of mortgage rates and credit card rates.  The rates are seen on www.CMBC.com, on the Bond Tab.

As I observe real estate prices I begin to notice that properties are longer on the market, price cuts are becoming more common and sales are less that list.  Rent prices are seeing the same in price cuts.  The actual rent is not covered by either MLS listings or sources like Zillow.  With all the cuts, activity is still very active.  Sales may take longer, sale prices maybe less than a year ago; but residential homes are selling!  What I see as being a precursor of lower asking prices is that if I take the cost of owning a home in Mortgage payments and compare it to a similar property for rent.  The rental is the same or more than ownership cost. 

Lower cost of living in residential housing will result in the FED lowering interest rates.  Helping affordability.

The Commercial Real Estate Market is seeing light at the end of the tunnel.  Investors who once shunned the beleaguered U.S. Property Market are coming back!  U.S. Office-Building Sales increased 20% from 2023 to $63.6 Billion.  With a large cash reserve the investors are expected to see sales activity to accelerate in 2025.  Norges Bank Investment Management, the Norwegian Sovereign Wealth Fund,  purchased last year 50.1% of eight properties in Boston, San Francisco and Washington D.C. at a value of $1.9 Billion.  Last year it also purchased an office Building on Sand Hill Road in Menlo Park, CA.  Venture Capital haven for Silicon Valley bodes well for the outlook in Silicon valley for new business startups and employee growth.

New York City is seeing a bigger growth in office building purchases exhibiting the tunnel maybe be getting behind the Commercial Property Market.

Led by a bevy of big-ticket tech deals, office leasing volume in Silicon Valley has soared to 2.4 million square feet in the fourth quarter, the first time the quarterly total has topped 2 million square feet since Q2 2019.

A leasing surge of more than 4 million square feet in the second half of 2024 pushed the full-year deal; volume over 5.5 million square feet in Silicon Valley, setting the stage for a potentially robust office recovery in 2025.

The overall office availability rate in Silicon Valley dropped by 160 basis points, or 1.6%, to 25.9% in the fourth quarter, down from 27.6% in Q3 2024.  Available sublease space in Silicon Valley totaled 6.6 million square feet at the end of 2024.  A drop of 25% from 8.8 million square feet available at the end of 2023. 

As before, call or write for any question you may have and think of me of your "in the know real estate professional".

The Problems Are The Path: 2025 Starts the Year Off With Carry Over from 2024

 HAPPY NEW YEAR!

The year starts out with the California Legislature passing additional laws in the Rental Marketplace.  

AB 2493 – Tightens Rules for Application Fee Screening
This new law authorizes a landlord or their agent to charge an application screening fee only if the landlord or their agent, at the time the application screening fee is collected, offers an application screening process, as specified. This bill would also prohibit a landlord or their agent from charging an applicant an application screening fee when they know or should have known that no rental unit is available at that time or will be available within a reasonable period of time.

AB 2347 – Alters Rules for Eviction
This law extends the time in which a defendant, in a summary proceeding for obtaining possession of real property, must file a response from 5 to 10 days, excluding specified days, after the complaint is served on the defendant.

AB 2801 – Changes in Security Deposit Rules
This law limits claims against the tenant or the security for materials or supplies and for work performed by a contractor, the landlord, or the landlord’s employee to the amount necessary to restore the premises back to the condition it was in at the inception of the tenancy, exclusive of ordinary wear and tear. It also prohibits a landlord from requiring a tenant to pay for, or asserting a claim against the tenant or the security for, professional carpet cleaning or other professional cleaning services, unless reasonably necessary to return the premises to the condition that it was in at the inception of the tenancy, exclusive of ordinary wear and tear.

The law also prohibits the landlord from using the security deposit for deductions for repairs or cleanings that are not identified in the required itemized statement of conditions, if an initial inspection is conducted and, at the time of inspection, the premises do not contain tenant possessions that prevent the landlord from identifying repairs or cleanings due to the presence of those possessions.

This law requires, for tenancies that begin on or after July 1, 2025, a landlord to take photographs of the unit immediately before, or at the inception of, the tenancy. The bill would also require, beginning April 1, 2025, the landlord to take photographs of the unit within a reasonable time after possession of the unit is returned to the landlord, but prior to any repairs or cleanings for which the landlord will make deduction from or claim against the security deposit, as described, and within a reasonable time after such repairs or cleanings are completed. The law additionally requires the landlord to provide, as described, these photographs along with and at the same time the itemized statement is sent, along with a written explanation of the cost of the allowable repairs or cleanings. The law prohibits the landlord from making a claim against the tenant or the security if the landlord, in bad faith, fails to comply with these itemized statement requirements.

SB 611 – Elimination of Fee to Tenant for Serving a Notice of Eviction
This law prohibits a landlord or its agent from charging a tenant a fee for serving, posting, or otherwise delivering any notice.

This is wonderful protection for Renters...BUT....who is there to enforce them?  Landlaord live in a neither world of the past.  Caveat Emptor or Buyer Beware was eliminated in the Legistation of the mid 80s the a full disclosure on the sale and purchase of residential 1-4 units.  Not so in rentals.  Landlords and their agents can still rent under the comment "It's ready to be occupied'".   No termite inspection, no home inspection, no notification of work done or permitted work is disclosed.  Landlords are not even licensed witht he State Department of Real Estate.  So while the the Legislature passes laws.  Landlord are not obligated to comply.  It is left up the the Renter to file complaints hire attorneys.  If the law is broker in a residential sale, the same department has the ability to work with buyers thorough the complaint process of the DRE.

Landlords, protect yourself from legal disputes – 5 renter complaints to never delay dealing with

Now here is where I go into the lack of inventory.  46% of the homes in California are rentals.  Of the 54% that are owner occupants, 87% are with mortgages of less than 6% mortgage rates.  Logic tells me, "Why would I sell my home and then refinance a new home at 7% rates and pay a higher property tax on the new home?

Insurance!  Daily I receive pleas for help with home insurance needs.  From insurance companies doubling or tripling insurance to new conditions that require upgrades to renew old policies with higher premiums.  This will be the issue that makes home owners begin to wonder about staying in California.  As beautiful as it is. The cost of insurance has gotten to be a burden on the Baby Boomers who have retired on a fixed income.  The recent fire in LA will only increase the exit of insurance companies and the increases in premiums.  Pressure will be felt more dramatically on the rental market as landlords will find it hard to pass on premiums to renters.  The shift out of residential income properties will aim toward the NNN or Triple Net marketplace where the commercial renter pays taxes, utilities and maintenance.  A good Deal for investors as they receive a cash flow net and maintain property that has a scheduled increase in rents.

That leads me back to rental homes.  If the rental market were cleaned up and the same full disclosure rules are applied, then we may see less evictions and more rentals being sold due the reluctance of the owners to follow the Full Disclosure Law that applies to 1-4 unit sale in the residential market.  

The indications are clear that the rental market is in store for change.  8 States, including California has started actions against the use of AI to calculate Rents. 

“Every day, millions of Californians worry about keeping a roof over their head and RealPage has directly made it more difficult to do so,” said California Attorney General Rob Bonta in a written statement. 

There is one source where renters are moving to that is getting good marks, TikTok, https://sfstandard.com/2024/01/31/tiktok-san-francisco-apartment-rentals-real-estate/. Check it out

Sooner or later someone in Sacramento will look at the disclosure inconsistency.  Then the landlords who treated the tenants like russian Serfs will face retribution.  Unfortunately it is the minority who will make the honest tenant interested investor who will suffer with added costs.  Or they too will sell and put their proceeds out of the state or into commercial properties that are on the bargain market.

Commercial Real Estate is seeing some changes nationally.  In New York City the largest Office Rental Owner is SL Green.  Business is so brisk they plan on adding to their portfolio of office rentals by year end 2025.

In Silicon Valley Commercial vacancy rates remain high at 20%.  There is a change in the numbers that have recently been published in the San Jose Mercury News.  At least 8 tech companies with AI have taken new offices.  A positive move for a market that was once under intense pressure.  As the commercial market begins to change and the return to the office begins to gather force.  It will be seen in housing demand. Leasing Boom Propels Commercial Market

Residential housing in Silicon Valley is never an issue to forget and wait to buy.  The cost of housing will always be high, but the benefits of living in Silicon Valley far outdistance the cost of living. Proposition 13 is one of the greatest benefits to residential owners.  The ability to lock in property taxes without the fear that increase property taxes will force owners to sell is great.  Of the Counties of California Two Counties are at the top of the list benefiting from the lock in of Prop 13.  The SF Chronicle recently had an article on it.  Read it here: https://www.sfchronicle.com/projects/2025/prop-13-subsidy-california/

2025 will see a diverse market in real estate.  The Luxury Market will continue to see demand irrespective of prices.  All fed by the TECH Stock rally.  The starter home market will continue to see demand while prices forecasted by Zillow for the next year will be off 2% or so.  Any weakness in price will be taken up by the quality of life and the beauty of living in Silicon Valley with Silicon Valley's Diverse Population, Highly Educated Population, Educational Opportunities, Medical Superiority, Climate and Social Activities.  Forecasts 2025 Housing Market

Over the next 2 years we will see interest rates as dictated by the FED go down to 3% level, from the present 4.25% level. That will mean mortgage rates will go down with it. Buy now and refinance in 2-3 years will be a benefit in having a permanent home.  It will benefit investors as their commercial property bought with a net return to them of 6.5-7% will increase in value from the decline in cap rates and the comparative analysis on the new rates available. Not bad for a No Brains decision.

As before, call or write for any question you may have and think of me of your "in the know real estate professional".

The Problems Are the Path: Interest Rates and Future Targets

The FED target for interest rates in two years is 3-3.25%.  There was some upset investors after the last FED meeting that took the Stock Averages down precipitously.  The expectations were there would be a series of interest rates cuts in 2025, that the FED determined would not occur.  Well, what does it matter?  Think about you are traveling  from your home to Lake Tahoe, or from Sacramento to Menlo Park or Menlo Park to Sacramento.  The trip from the Bay Area or visa versa will take 3 hours, give or take 15 minutes.  You can go on via Hwy 5, or 80, or 680, or 580 or some combination of all of them.  But when it comes to arrival you will be there at about the same time.  So why is there the big hullabaloo over how many rate cuts we get in 2025.  You could start out from Sacramento get onto 5 and then there is an accident.  Or you could do the same on 80, another tie up.  Take the cut off onto 680 from 80 and another tie up.  You could stay on 80 all the way to the Bay Bridge and find another jam.   Or, you are lucky and no jams and smooth traveling any you are there in less than 3 hours.  The result is whichever route you take you will arrive at about the same time another driver takes with the different route.  So, why the upset of 2 or 3 cuts in 2025 or one?  It only means that there will be other cuts in 2026 to get to the 3-3.25 rate when we are at the 4.25-4.5% rate now!

One thing I do see is the optimism for the Silicon Valley is high.  Home Prices are rising!  People are returning back to work in offices.  Commercial Properties are picking up.  Job numbers are improving in Silicon Valley.  Sooner or later prices will increase in San Francisco and prices of the communities that once drew work from home works will drop.  It has been 4 years since the Pandemic drove people out of the Bay Area.  I watch home prices in the Sacramento Valley and eastern Sierra Hills communities.  New projects are dominant.  From Elk Grove to El Dorado Hills to Placerville land is cheap and available.  Builders are covering the area.  The problem with the new developments is the cost of utilities and the availability of Doctors.  More people move in the practice is full for the senior medical physician or dentist and new ones are hard to find unless you are willing to drive a distance that becomes longer as more people move.

Sooner or later the return occurs.  We are seeing that now.  the new email to the "work from home" employee is: come to work or you are fired! 

Build and they will come has always been a well observed axiom in real estate.  Except how long will it take for them to come?  Then once you come how long will it take to acclimate and will you stay or return from whence you came?

The great investment opportunity I see is that the Commercial projects are centering around a new level...7% Cap Rates.  The FED say 3-3.25% in two years from the present 4.45%-4.5% Cap Rates will come down.  That makes the properties bought at 7% appreciate solely from the change in Cap Rates.  A Layup in my view for investors in Commercial Properties!

Happy New Year, just some food for thought as I observe the coming of 2025.

As before, call or write for any question you may have and think of me of your "in the know real estate professional".