New Approach to Market Behavior 2026

2026 Q1 Strategic Outlook: Capital Allocation in an Era of Volatility

The fundamental law of investing dictates that capital flows toward the highest risk-adjusted return. However, empirical analysis shows that the drive for yield often overshoots its target.

As I transition into my role as Senior Investment Strategist for McKae Capital Management, my focus is on the macroeconomic data required to navigate this landscape. In 2026, the market is rewarding discipline and punishing complacency.

Macro Trends: The Inflationary Signal in Energy and Utilities

To forecast Real Estate performance, we must first look at the broader capital markets. We are currently seeing a distinct divergence in sector performance:

• Energy (XLE) & Utilities (XLU): These have been the dominant performers of 2026. The breakout in XLE (up 22.7% YTD) and XLU (up 8.5% YTD) is a primary indicator of persistent inflationary pressure. Utilities are surging due to the massive power demands of AI data centers (the "AI-Energy Nexus").

• The Fed’s "Parting Gesture": With inflation trending upward, the Fed remains hawkish. This friction has left the Finance sector (XLF) lagging behind, as shown in the data below.

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The Great Rotation: Tech to Tangible Assets

Technology stocks (XLK) are facing a valuation reckoning. This is triggering a strategic rotation into Real Estate (XLRE) as investors seek tangible yield.

1. The Sunbelt Decompression: We are observing price cuts and expanded "days on market" in Florida and Texas as inventory finally catches up with demand.

2. The Bay Area’s Fundamental Recovery: Contrary to the "doom loop" narrative, the Bay Area is showing institutional resilience. As AI firms transition to "operational efficiency," the return-to-office mandate is strengthening, stabilizing the multi-family sector in the Menlo Park/Palo Alto corridor.

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Strategic Warning: The Hidden Risks in NNN Leases

For many HNWIs, Triple Net (NNN) leases have been a "set it and forget it" strategy. In 2026, that is a dangerous assumption. The financial sector's underperformance (XLF down roughly 9% YTD) highlights a structural shift.

• Corporate vs. Management Signatories: Ensure the lease is backed by the corporate parent with deep pockets, not a shell management entity.

• Residual Value: In 2026, the credit-worthiness of the tenant is as important as the location of the dirt.

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The Strategy for 2026: Reallocation and Diligence

We anticipate a volatile market for the remainder of the year. My advice is to reallocate. Look for multi-family housing, warehouses, and storage facilities in core markets.

SHOP, SHOP, SHOP. The most significant opportunities of the decade will knock in 2026—but only for those positioned to answer.

Gary McKae Senior Investment Strategist

McKae Capital Management

📧 gmkae@sbcglobal.net

🏢 655 Oak Grove Avenue, #1346, Menlo Park, CA 94026

📞 (650) 743-7249

DRE# 01452438 | Securities License: Pending/TBD

The 2026 Transition: A Fiduciary’s Perspective on Market Liquidity and AI Displacement

The Steady Hand: Navigating the 2026 Capital Transition

By Gary P. McKae, CIMA®

If you notice a change in the direction of this newsletter, it is purposeful. As I transition McKae Properties into McKae Capital Management, Inc., my focus has shifted from property transactions to the broader stewardship of multi-asset portfolios and fiduciary oversight.

As we move into 2026, the investor market is clarifying enough to begin making critical strategy decisions, rebalancing portfolios, and reviewing complex debt structures.

The Macro View: A Consumer Mixed Bag

The current landscape reveals a stark divide. While government data shows a lack of vigorous consumer confidence, corporate profits suggest that the consumer remains active when affordability is prioritized.

The Real Estate Liquidity Trap: Current reports on owning vs. renting indicate a stagnant sales market. We are seeing a significant "buoyancy" in the rental sector, but for the wrong reasons. Many new rentals were once single-family residences with no prior rental history. This is a dangerous indicator: owners who cannot achieve their desired exit price are choosing to rent instead.

In my 50 years of navigating market cycles, I have seen this before. It is the real estate equivalent of an unexecuted limit order in the stock market. When "Limit Orders" remain above market value, action is frozen until panic hits. Real estate lacks the liquidity of equities; price cuts are often delayed until fear drives a "bottom spike."

Commercial Reckoning and the California Climate

In the commercial sector, owners are facing a "perfect storm" of leverage issues and deferred maintenance. Mortgages that were not wisely structured—specifically those with adjustable rates—are now working against the borrower.

In California, these issues are compounded by a legislative environment that increasingly favors renters over owners. Eviction is no longer a simple solution; it is a significant legal expense that depletes Net Operating Income (NOI). For those in the Triple Net market, the risks are now tied to corporate volatility. We see this with Rite Aid—bankruptcy hits, and the property owner is left with a vacant building and a vanishing income stream.

The AI Shift and the Global Transition

Artificial Intelligence is no longer a future threat; it is currently hitting junior and middle management. This structural shift is forcing a long look at career retraining or relocation. This directly affects residential markets where home prices were overstretched.

The U.S. economy is in a profound transition. We have historically supported a "social paradise" fed by an ever-increasing income from technologically oriented taxpayers. As that "food source" shifts due to AI and debt pressure, drastic measures will be required for capital preservation.

The "Steady Hand" Perspective

On the positive side, the stock and bond markets offer significant opportunities for those who can distinguish between market noise and systemic risk. A market of positive returns and declining bond coupons favors value increases, but speculation will create extreme volatility.  In my five decades of navigating capital cycles, the current divergence between US Debt and technological displacement is unprecedented

This volatility will thin the ranks, leaving a professional core of investors and advisors who understand how to prosper in uncertainty. As a Wharton-educated CIMA® and former Mayor, I believe that "Perspective" is the most valuable asset an advisor can provide.

The "Steady Hand" Philosophy:

"I consider age not a marker of retirement, but a marker of Judgment. Having managed capital through the 1974 recession, the 1987 crash, the 2000 tech bubble, and the 2008 financial crisis, I provide the perspective that ultra-high-net-worth families require to stabilize and grow their legacy".

I look forward to hearing your thoughts on this new direction.

Gary P. McKae, CIMA® Senior Investment Strategist | Fiduciary Leader | Former Mayor of Woodside 

📍 McKae Capital Management, Inc. 📧 gmkae@sbcglobal.net 📞 (650) 743-7249 🏢 655 Oak Grove Ave. #1346, Menlo Park, CA 94025 DRE# 01452438

2026 A Year of Chaos or Change?

2026 Market Outlook: From Macro Volatility to Real Estate Reality

From the capture of a Head of State to the potential indictment of a Federal Reserve Chairman, we have started 2026 with a "BOOM." While the headlines are loud, the numbers in the real estate sector tell an even deeper story.

Commercial Real Estate: The Bay Area Reset Commercial Real Estate in the SF Bay Area continues to face headwinds. Cap rates are trending upward as valuations adjust to a new reality. Notably, a major tech campus recently traded for 33.7% less than its purchase price a decade ago. We are seeing a shift in the retail landscape as well: while bank branches close, national giants like Costco and Walmart are impacting local pharmacies and "Mom & Pop" shops. The transition from "Rent" to "For Lease" signs in storefronts remains slow but steady. Interestingly, cap rates have increased from early 2025 into 2026, even as Fed Funds rates have begun to decline.

The Residential Affordability Crisis Nationwide, 75% of homes currently on the market are unaffordable to the typical American household. Prices remain 50% higher than pre-pandemic (2020) levels. In coastal hubs like New York, Los Angeles, Miami, San Francisco, San Diego, and San Jose, the situation is even more dire. According to Zillow, even a 0% mortgage rate would not be enough to make a median home affordable in these markets.

The California Exodus & Policy Shifts California’s recent rent control expansions are intended to protect renters, but they are increasingly viewed as a deterrent for landlords. Consequently, cap rates on multi-family assets are rising as investors look out-of-state for friendlier environments.

As Sean Roberts, CEO of Villa, recently told Fortune:

“We see the housing market remaining relatively stuck... until we see income growth rapidly accelerate, mortgage rates decline materially, or home prices come down—all of which remain unlikely.”

Furthermore, President Trump has proposed legislation to ban corporate ownership of single-family homes, adding another layer of uncertainty to the market.

The Strategy: What to do? At some point, prices must yield to the sheer weight of negative sentiment. We are already seeing a correction in the residential sector, with weekly price cuts becoming the norm—not just in California, but in "evacuation states" like Florida, North Carolina, Nevada, and Arizona.

For many families, renting is now more financially viable than the combined costs of a mortgage, property taxes, and maintenance. In California, a new proposal for a 5% tax on billionaires threatens to further drive out the primary sources of jobs and investment.

The Bottom Line: Whether you are a home buyer or a commercial investor, the strategy is clear:

1. Sellers: Accept realistic offers and move on.

2. Buyers: Make aggressive offers below list price to achieve acceptable cap rates or affordable monthly payments.

Expect a slow market for the remainder of 2026. Be diligent, keep analyzing deals, and stay ready. Opportunity will knock.

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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