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
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