Rents Declining

                                      

Rental Market Shifts: What’s Really Driving Peninsula Prices

October 13, 2025 – by Gary McKae

I recently reviewed rental prices across the San Francisco Peninsula after several things caught my attention:
1️⃣ A buyer exploring a multi-family investment.
2️⃣ A recent CoStar report on national rent trends.
3️⃣ My own curiosity about local rental housing.
4️⃣ Personal interest in residential purchase opportunities.

Rents and Prices: The Asset Class Connection

Over the years, I’ve watched home prices and rents move in tandem. That’s because both are driven by the same underlying factor—real estate as an asset class.
Every property has an intrinsic value tied to its highest and best use—whether that’s a ranch, a farm, an office building, or a single-family or multi-family residence.

When housing prices rise, rents naturally follow. As homeownership becomes less attainable, more people are forced into the rental market. Combine that with Gen Z’s preference for flexibility, urban convenience, and child-free lifestyles, and apartments remain the housing type of choice.

A Sudden Shift: Rent Drops in September

What truly surprised me in my latest review was the dramatic decline in rents for September.
According to CoStar, “U.S. monthly apartment rent growth declined last month in its deepest September drop in more than 15 years as excess supply affected all parts of the country.”

The national average rent fell to $1,712, a 0.3% decrease from August’s $1,717. This marks the third straight monthof flat or negative rent growth — a clear signal of softening demand despite seasonal adjustments.

Local Snapshot: Redwood City and Palo Alto

In Redwood City, I found homeowners out of sync with the current market. Asking rents were being cut by $1,000 per week, and Palo Alto, typically a strong market, also showed steady declines.
Owners using Zillow are dropping prices, lowering credit-score requirements, and allowing pets—a soon-to-be-irrelevant change as new California laws will require broader acceptance of pets in rentals.

We’re also seeing the return of landlord-paid landscaping and water, signaling a competitive shift back to pre-pandemic standards.

Impact on Multi-Family Investments

This softening rent trend will ripple through the multi-family sales market.
Offering Memorandums that rely on Pro Forma rents to justify higher cap rates are increasingly unreliable.
Instead of rent growth, Peninsula investors may be fortunate just to hold steady.

San Francisco: A Contrarian Recovery

Interestingly, San Francisco is bucking the national trend, posting 6.1% annual rent growth.
After years of decline during the pandemic’s “work-from-home exodus,” the city is rebounding as AI firms and tech employers mandate a return to the office.
This resurgence is re-energizing the local rental market—both for apartments and homes.

The Changing Face of Landlords

Single-family rentals have long been the realm of “Mom & Pop” landlords—owners who inherited homes or converted past residences into investments.
Two waves reshaped this market:

• First, institutional investors buying REOs after the foreclosure crisis.

• Second, corporate buyers and REITs seeking steady cash flow.

Now, new California landlord-tenant laws have shifted the balance of power toward tenants.
Landlords face stricter health, safety, and habitability standards—with Superior Courts often siding with tenants.
Many small landlords are selling to avoid escalating fines and compliance costs, while others are moving assets to states with lower taxes and fewer regulations.

The Migration Continues

The out-migration from California is not just about lifestyle—it’s economic.
Lower property taxes and income taxes elsewhere translate to higher net operating income and better cap rates.
For investors, this migration trend presents a strategic opportunity to diversify portfolios into growth states offering more favorable returns.

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Final Thoughts

California remains one of the most dynamic real estate markets in the world, but it’s also among the most challenging.
For landlords, tenants, and investors alike, understanding the true relationship between price, rent, and regulation has never been more important.

For more information on new landlord-tenant regulations and tenant rights, contact me for a  copy of my Renter’s Survival Guide

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

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

©2025 Engel & Völkers. All rights reserved. Each brokerage is independently owned and operated. All information provided is deemed reliable but is not guaranteed and should be independently verified. If your property is currently represented by a real estate broker, this is not an attempt to solicit your listing. Engel & Völkers and its independent License Partners are Equal Opportunity Employers and fully support the principles of the Fair Housing Act.

Government Shutdown

 

WHEN THE U.S. GOVERNMENT SHUTS DOWN — CREDITABILITY TAKES THE FIRST HIT

When the U.S. Government shuts down, the first and most immediate impact is credibility. The global community begins to question whether the United States can honor its commitments — from paying its bills to maintaining economic stability.

The Immediate Effect: Residential Real Estate

Real estate professionals first look to the residential market for signs of disruption. During a shutdown, key federal agencies slow down or completely halt essential services:

• Federal Flood Insurance policies are held up.

• Federal Housing Administration (FHA), Veterans Affairs (VA), and U.S. Department of Agriculture (USDA)loans may face significant processing delays or suspensions.

• The IRS may stop processing tax transcripts or income verifications, which can stall or kill mortgage approvals.

These disruptions ripple through home sales, refinancing, and construction starts — creating uncertainty for lenders, buyers, and builders alike.

The Broader Impact: Commercial Real Estate

The far-reaching consequences are even more severe in Commercial Real Estate. The absence of federal data and market guidance injects uncertainty into every corner of the financial system:

• Reduced demand for commercial property as both government agencies and private businesses delay or cancel leasing and development projects.

• Financing becomes difficult as banks hesitate to fund new deals amid unclear economic forecasts.

• Permits and approvals are delayed, leaving construction and redevelopment projects in limbo.

When federal agencies close, vital economic data stops flowing. Without labor statistics, inflation reports, and housing-start figures, even the Federal Reserve lacks the information it needs to make sound policy decisions. Multifamily investors lose visibility into key indicators like building permits and housing completions — critical tools for analyzing market supply.

The Sectoral Fallout

The Retail, Hospitality, and Senior Housing sectors feel the pain first. Hospitality is especially vulnerable as consumer spending tightens. Areas with a high concentration of government workers face furloughs and layoffs, further depressing local economies.

Small businesses — particularly restaurants, retailers, and service providers — are hit the hardest. Operating on thin margins, many are forced to close or take on debt just to survive.

Meanwhile, Federal and Institutional Commercial Real Estate markets freeze. Properties sit unsold, leases remain unsigned, and Real Estate Investment Trusts (REITs) dependent on steady rent payments struggle to cover operating expenses. Dividends may be suspended, leaving income-dependent investors — retirees in particular — exposed.

Construction Comes to a Halt

Government-funded construction projects stop immediately. Developers depending on progress payments or public contracts face mounting fixed costs with no relief in sight. Completed developments and remodels face “Due on Completion” clauses that can’t be met because buyers disappear. Foreclosure notices rise as lenders — themselves under pressure — hesitate to assume property ownership costs.

Turning Lemons Into Lemonade

Amid the chaos, cash-rich investors find opportunity. With credit markets frozen and fear widespread, high cap rates and favorable terms return to the market — conditions unseen since the last major economic disruption.

Those with liquidity, discipline, and a long-term view will find that a government shutdown, while painful, can also reset pricing and create generational buying opportunities.

👉 Bottom line: This rate cut signals the start of a new easing cycle. For real estate, it may not be transformative on its own, but it restores momentum at a time when confidence has been under pressure. The real question now is how quickly the Fed follows through — and whether inflation allows them to keep cutting.

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

 

THE FED MAKES FIRST CUT

The Federal Reserve cut its benchmark interest rate by a quarter percentage point on Wednesday — the first reduction in nine months. Policymakers now project at least two more quarter-point cuts before year-end, up from earlier forecasts. The move brings the federal funds target range down to 4%–4.25%, after holding steady through five consecutive meetings.

Why the Shift?

Recent data shows slowing payroll growth, rising unemployment, and persistent inflation pressures. Fed Chair Jerome Powell acknowledged these mixed signals:

“Unemployment remains low, but we see downside risks,” Powell said.

Inflation has climbed for four consecutive months, hitting the highest level since early 2025, even as job creation has stalled. That combination of slower growth and rising prices — stagflation — forced the Fed’s hand.

Political pressure has also intensified. President Trump has repeatedly criticized Powell for being slow to ease, while controversy surrounding Fed board members added tension to this week’s meeting.

Market and Real Estate Reactions

Commercial and residential real estate professionals see the cut as a welcome, if modest, catalyst:

• Commercial: Lower financing costs could revive deal activity, particularly in multifamily and equity-driven transactions. Office remains the laggard but may see a morale boost.

• Residential: Mortgage rates have already ticked lower. Freddie Mac reports the 30-year fixed average fell to 6.35%, its lowest since October 2024. If rates trend below 6%, more buyers could reenter the market, and refinancing opportunities would expand.

As Josh Winefsky of HSF Kramer noted:

“It brings some positive momentum to a category that needs it.”

Parallel Moves Abroad

The Bank of Canada also cut its overnight lending rate by 25 basis points, to 2.50%, its first reduction in six months. This synchronized easing adds further momentum to global capital markets.

What Comes Next?

The Fed’s “dot plot” now implies two additional cuts in October and December. Yet, divergence among policymakers remains — one member pushed for a half-point cut this week. Powell emphasized a “meeting-by-meeting” approach, acknowledging the delicate balance between cooling inflation and supporting jobs.

Implications for Housing and Investment

Lower borrowing costs may:

• Entice sidelined buyers back into housing markets.

• Encourage homeowners to list, easing supply shortages.

• Boost refinancing activity, improving household cash flow.

For commercial real estate, incremental cuts won’t solve systemic challenges like tariffs, high construction costs, or structural office vacancies. But as BGO’s Ryan Severino put it:

“If it portends looser monetary policy ahead, it could provide a safety net — even if monetary policy cannot fix everything that ails the economy.”

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👉 Bottom line: This rate cut signals the start of a new easing cycle. For real estate, it may not be transformative on its own, but it restores momentum at a time when confidence has been under pressure. The real question now is how quickly the Fed follows through — and whether inflation allows them to keep cutting.

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