Residential Stall, Commercial Surge: A Market in Transition
The residential real estate market is finally seeing a return of inventory—but demand is not following suit.
High mortgage rates, rising insurance premiums, and general affordability concerns have locked many buyers in place. For now, the cost of renting continues to outweigh the cost of ownership—yet paradoxically, that financial logic hasn't translated into buyer urgency. The result? A market full of hesitancy.
The “Sell-to-Return” Dilemma
Adding pressure to the market are homeowners who must sell in order to return to the workplace. The remote-work migration during COVID-19 led many to relocate to more affordable regions such as the Central Valley, Sacramento area, and the East Bay. Now, corporate mandates are calling employees back, creating a wave of reluctant sellers.
Some can’t afford to repurchase near their former employment centers. Others are realizing that their current home won’t sell at a price sufficient to meet their financial goals—or even cover the cost of moving back. And therein lies the heart of the matter: satisfying their needs in a market that no longer supports their expectations.
The pressure will likely build. These migration markets face four years' worth of returning inventory. My advice: Sell now, before you’re forced to sell for less.
Luxury Markets: Still in Orbit
Not all sectors are feeling the pinch. Ultra-luxury communities—like Los Altos on the San Francisco Peninsula—continue to see competitive bidding, with six-figure premiums over list price. Liquidity from tech-sector stock sales is being recycled into high-end real estate, reinforcing the notion that cash is still king—at least at the top of the market.
The Commercial Advantage
While residential mortgage rates have remained stubbornly high, commercial real estate financing is far more attractive. Current loan rates include:
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Multifamily (5-year): 5.20% – 6.29%
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Multifamily (7-year): 5.26% – 6.29%
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Multifamily (10-year): 5.39% – 6.63%
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General Commercial Loans: 5.85% – 6.58%
These rates align favorably with current cap rates—often exceeding borrowing costs—providing a rare positive carry opportunity for commercial buyers. Lenders are clearly confident: if recession were on the horizon, underwriting would tighten, not expand.
What About the Fed?
Despite continuous headlines, residential mortgage rates haven’t budged. Commercial lending, by contrast, shows meaningful declines. Although the Fed has hinted at potential rate cuts, Chairman Powell recently attributed delays to ongoing tariff uncertainty—a statement that could be interpreted as a rebuttal to President Trump’s criticism of the Fed’s policy stance.
Markets had anticipated a possible cut in July, but that now appears unlikely. Still, most analysts expect cuts by year-end. In the meantime, expect continued softness in residential pricing, especially among investment properties that failed to yield expected returns and are now returning to market.
A Two-Speed Market
The bifurcation is clear: buyers with strong income and credit will have leverage. They’ll be able to negotiate price, select from increasing inventory, and lock in rates as they begin to trend downward—eventually helping to stabilize inflation and restore affordability.
Commercial owners who locked in financing near 6% are now well-positioned. With rent growth and occupancy stabilizing, refinancing within the next few years could reduce costs, increase NOI, and free up capital for new investments.
Final Takeaway:
Residential real estate is resetting. Commercial real estate is recovering. Strategic investors—especially in multifamily and value-add sectors—will find this a compelling window. The difference, as always, is timing.
If you’d like help evaluating your next move—whether selling, exchanging, or investing—Pacific West Advisory Group is here to provide the insights and execution you need.
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