Jackson Hole Surprise

PACIFIC WEST INSIGHTS NEWSLETTER

AUGUST 25, 2025

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Negative Thoughts

Spotting Clouds in a Carefree Market

Reflections on Cycles, Risks, and Real Assets

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

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Looking Back: Lessons from the 1970s

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

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

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Clouds on Today’s Horizon

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

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Economic Outlook

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

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

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

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Market Valuations

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

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Politics and Its Impact

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

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Commercial Real Estate: A Mixed Bag

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

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Office Market

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

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Multifamily Housing

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

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

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Commercial Property Challenges

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

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

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The Real Estate Investor’s Dilemma

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

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The Final Thought

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

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Conclusion: The Investor’s Outlook

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

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

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

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

COWBOY LOGIC, GROWTH AND EMPLOYMENT

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

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

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

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

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AI Disruption Without Labor Fallout?

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

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

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Immigration, Consumer Behavior, and Job Resilience

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

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

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

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

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Bad Data? History Says It Happens

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

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

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

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How This Impacts Real Estate Markets

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

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Multifamily Housing: San Francisco & San Mateo/Burlingame

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

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

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

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Office Market: Still Sluggish, But Stabilizing

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

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

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Hotel & Hospitality: Momentum, But Long Road Ahead

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

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

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Conclusion: Trust the Market, Not Just the Models

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

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

We don’t. Or at least not yet.

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

That’s cowboy logic.

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

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