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.
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.
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:
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.
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.
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.
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:
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.
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.
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.
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.
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.
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
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