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.

Happy New Year

Looking Back at 2025 — A Framework for 2026

Before forecasting 2026, it is important to once again review 2025. The year revealed several formations that now shape expectations for the U.S. economy and the real estate markets heading into 2026.

2025 was a year of price adjustments. Both residential and commercial real estate markets across the United States experienced price reductions. In the Bay Area—and California more broadly—residential pricing softened while cap rates in commercial real estate began to rise.

Commercial Real Estate: The First Indicator of Change

Commercial real estate was the first sector to signal shifting conditions. Banks, pharmacies, and consumer-facing businesses experienced declining demand. As mobile and online banking took hold, financial institutions closed branches or limited the use of brick-and-mortar facilities. Some properties returned to the market with high cap rates, often supported by continued rent payments from parent banks. Others, however, were leased to management companies rather than the parent institutions—many of which have since filed bankruptcy—leaving property owners to salvage value and find replacement tenants.

As this inventory grows, competition among sellers increases. The result has been higher cap rates, whether actual or pro forma, across many commercial asset classes.

The most significant drivers of change appear to be shifts in U.S. government spending, combined with rapid advances in technology and artificial intelligence.

The Rise of the “Grave Dancer” Buyer

As triple-net (NNN) inventory expands, cap rates are rising accordingly. This environment favors a specialized buyer—often referred to as a “grave dancer”—who acquires distressed or vacated NNN properties and repositions them to meet current market demand.

Housing Demand & Employment Pressure

Demand within commercial real estate has remained strongest in multifamily housing. High home prices, limited inventory, and elevated interest rates kept many potential buyers sidelined in 2025. Added to this was growing concern over job security.

Large layoffs within the government sector created ripple effects throughout the economy. Social service agencies faced budget reductions or closures, forcing many workers to reassess their careers. The common outcomes were selling, downsizing, or attempting retraining—often leading to financial stress and, eventually, foreclosure.

Foreclosures are rising, both nationally and within parts of the Bay Area. To avoid foreclosure, homeowners must sell, relocate, or secure new employment—none of which are easy options for middle management or technology workers. The result has been lower listing prices and increased rental demand.

The Shift Toward Rentals & Corporate Ownership

For those unwilling or unable to purchase homes, the alternative has been multifamily housing or single-family rentals.

In California, single-family rentals have undergone significant change. Legislative measures increasingly favor tenant protections while placing heavier burdens on landlords. Individual “mom-and-pop” owners—long dominant in this segment—have been hit the hardest. Over time, this has accelerated the transition toward corporate ownership, as institutional operators are better equipped to navigate regulatory complexity.

Expect continued corporate consolidation of single-family rentals and further downward pressure on residential pricing, as previously described.

Multifamily: Strong, But Not Immune

Multifamily housing should have remained strong in 2025—but it did not escape disruption. Cap rates began to reflect population shifts that originated during COVID. San Francisco experienced one of the most dramatic population declines as work-from-home policies allowed residents to relocate. Surrounding regions, including Sacramento, Tahoe, and even Hawaii, benefited from this migration.

2026: Early Signals & Structural Change

In 2026, political and economic shifts are becoming more visible. Several liberal cities have seen a return to more moderate or centrist governance—most notably San Francisco.

In the San Mateo County, cap rates on multifamily properties have begun to rise gradually. In contrast, San Francisco has seen cap rates decline as residents return for new employment opportunities and improved access to services. Among these, medical care availability remains one of the most critical drivers—particularly for aging populations and families requiring specialized care.

What to Expect in 2026

Looking ahead, expect:

Continued reductions in government spending
Fewer middle-management technology jobs as AI replaces traditional roles
Ongoing closures of small “mom-and-pop” businesses and empty storefronts
A lag as the economies of scale adjust
Adjust investment portfolios to the new normal

📘 For more information on landlord-tenant regulations or to receive a copy of my Renter’s Survival Guide, contact me directly.

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 these trends affect your portfolio?
Schedule a consultation or visit www.mckaeproperties.com for the latest market insights.

Year-end Commentary

Thanksgiving is behind us, Christmas is ahead and the comments of a Rate cuts remains divided. Whatever happens in the next two weeks on the rate cut may end up being a disappointment. The last rate cut did not see the equal drop in the 10 and 30 year bond. It saw a slight increase as inflation still remains a question.

The overall investment market appears divided. Whether it is the bond Market, the Stock Market or the Real Estate Market; one cannot get a majority consensus opinion.

In the San Francisco Peninsula the ultra luxury high end properties are seeing an exit of owners that are allowing large price cuts after 30 days on the market. San Francisco is not as badly hit as the Towns of Woodside, Atherton and Portola Valley, they just are not sheltered from the lack of optimistic buyers.

The layoffs of Silicon Valley have not be advertised much when it comes to packing bags and moving on to greener pastures. That may come later, a frustration that could indicate a point of purchase. Until then, keep one's powder dry appears to be the "Buyer's Attitude"

Across the nation the residential market is seeing price cuts which could be attributed to political agenda's of the media or actual fact. The buyer beware should be the model until some clear cut indications of our economy is clear. So far there is the same division of parties and supporter's of the opinions of where we will be December 31, 2026.

In the commercial venue there are some good and cautious attitudes. Rents on multifamily are slowly rising without too much objections from the renter. That is good news for the Multi Family owners. One can see that in the limited listings in the SF Peninsula with Cap Rates in the 5% or lower range is common in the San Francisco Market too.

Storage properties remain strong, a clear indication that many of the renters are putting belongings n storage waiting for a buying opportunity.

Car Washes are also quite strong and ironically during winter they will see an increase in income as the desire to "wash your own car in winter" gives way to the local car wash.

Retail is seeing continual weakness as the concern of a recession or slight weakness in the economy; along with a weak consumer confidence index. Banks, Drugs Stores are seeing the continuance of closings; as Amazon, Costco and Target hammer on prices competition; as well as, On-Line Banking and the use of curbside tellers. This leaves many owners worrying about the lease termination and how to address an empty property with a limited amount of time income but no occupant.

The bright star in the San Francisco area is San Francisco itself. A new mayor, a cleaning up of the streets of squatters and beggars along with a strong sense of safety has brought back many Corporate and Startup businesses. The City has a sense and feel as it did some 20 plus years ago. Now nothing like vested suits and high heals of the 80's, but a feel that makes a visitor, occupant and worker feel comfortable.

The year end comes down to Interest Rates, the Economy, and employment. the last final comment is Employment.

Silicon Valley is thinning middle management and programers (?). Artificial intelligence is a cheaper and more efficient replacement owing to the layoffs, but only time will tell if it is or will be efficient. So far from my use of AI, I feel it has done the work of several employees and legal council. Based on my reviews and my use, I say there will be a major change in the Employment numbers going forward. Then too, there is the migration out of the State of California as employment, the cost of living and the increasing cost of home ownership increases without abatement.

The last figure I saw was that California had a 5000,000 net loss of citizens. Well and good when one fails to consider the large estimated amount (+ 1,000,000) of legal/illegal immigrants who have offset the migration out of the state. One must consider weather loosing a mid level manager or a highly trained technician with substantially higher incomes is a good offset of tax dollars for the gain of a laborer? Is it a positive in the State Coffers when the taxes collected from high income migration out is worth the cost of care for the migration in until they become positive contributors to the Sate of California? Time will tell and ow many tax payers will have the fortitude to wait to see?

From and investment side it may be wise to invest when there is a secure cap rate and a secure lease before the Commercial Real Estate Investor make their next move, or just hold the cash in 4%+ government short term debt. Crisis and fear are always the best buying opportunities. whether it be stocks, bonds, commodities or real estate. Caveat Emptor.