San Francisco Office Rebound Splits Market
San Francisco Office Recovery Is Real but UnevenRecovery has begun to register in San Francisco’s office market, but the improvement remains narrow and unstable.Vacancy slipped from 34.4% to 34.2% in Q4 2024, the first quarterly decline in five years. By Q1 2026, vacancy improved to 28.0%, yet earlier readings near 36.9% in Q3 2025 showed how fragile conditions remained. In Q1 2025, total vacancy still climbed to 36.6%, underscoring the market’s uneven recovery.Recovery Concentrates in Select DistrictsPositive absorption appeared in Q4 2024 and strengthened to roughly 800,000 square feet in Q1 2026. Similar to San Diego multifamily, stable rental demand can coexist with weak transaction volume, highlighting how occupier strength does not always translate into broad investor confidence.Still, gains were concentrated in Showplace Square/Potrero Hill, Mid-Market, South of Market, and parts of the South Financial District.That pattern reflects neighborhood bifurcation and tenant polarization. The Financial District, which holds nearly two-thirds of city inventory, remained a drag as North Financial District vacancy rose.Leasing improved materially, but citywide emptiness stayed high overall.What’s Driving San Francisco Office DemandFueling the latest leasing wave, AI and frontier-tech firms have become the dominant force in San Francisco office demand.Their expansion lifted quarterly leasing above 3.4 million square feet, while AI migration helped concentrate talent, capital, and occupiers in the city.AI tenants already occupied about 7 million square feet, or 12% of total leased space, underscoring their unusually large footprint.Attendance Recovery Reshapes DecisionsReturn-to-office mandates and hybrid-work normalization also strengthened demand by raising office traffic and supporting more consistent in-person collaboration.That attendance recovery translated into stronger tenant requirements, with citywide demand rising sharply year over year and surpassing pre-pandemic averages.Broader Buyer Pool EmergesVenture capital, finance, and legal users added momentum.At the same time, amenity preference pushed tenants toward newer, sustainable, higher-quality buildings at rising asking rents.Elsewhere on the West Coast, policies such as Seattle’s rent cap legislation are reshaping real estate investment strategies and highlighting how regulation can influence property demand.Where San Francisco Office Leasing Is StrongestLeasing strength has clustered in a handful of submarkets. The Financial District and South Financial District have absorbed the largest share of recent demand.Mission Bay, China Basin, and select core waterfront corridors are also capturing growth from specialized users.The Financial District remains the city’s broadest leasing hub. It is supported by financial services, AI, and technology tenants seeking prestige, neighborhood branding, and transit accessibility.South Financial District accounted for nearly all positive net absorption in early 2025.Growth NodesMission Bay and China Basin continue to attract life sciences, biotech, and AI firms. They benefit from UCSF proximity and newer amenity-rich buildings.Along the Embarcadero, established firms still favor central waterfront addresses. Strong transit accessibility and visibility continue to support demand.SoMa, Dogpatch, Potrero Hill, and the Presidio also participate through smaller, flexible deals. These areas appeal to creative users and downsizing tenants.How Rents and Vacancy Split by Building QualityAcross San Francisco, the office market is dividing more sharply by building quality. Top-tier assets are holding pricing power, while older space absorbs the strain of elevated vacancy.Tenant preferences continue to favor newer, amenity-rich towers. Demand is especially concentrated in submarkets around the Financial District and premier CBD blocks.Trophy buildings reached asking rents of $103.76 per square foot. Top floors in prime towers climbed to $134.77.
Class A Tier 1 direct vacancy fell to 9.1%. That remains far below the market’s 32.5% vacancy level.Class B and C space posted 37% availability. That points to weaker demand and slower recovery prospects.Rent differences also reflect operating burdens. Base rent may look competitive in older buildings, but operating expenses can add $20 to $35 per square foot.Those added costs can widen total occupancy cost differences significantly.What the Rebound Means for Office InvestorsThat widening gap in building performance is now shaping investor strategy, as capital concentrates in San Francisco’s best office assets.Institutional buyers deployed $1.7 billion in the first half of 2026, while cumulative sales reached $4.7 billion across 147 deals through the third quarter.Blackstone and New York Life targeted discounted trophy assets, betting today’s 30% to 50% pricing gap can narrow by 2030.Lower-Tier Pressure IntensifiesFor owners of Class B and C buildings, the rebound raises pressure for strategic dispositions, capital recycling, tenant retention, and adaptive leasing.CBRE data shows Class A and A+ properties captured 87% of recent occupancy growth, while AI tenants drove most leasing demand.With no new construction underway, and lower-tier vacancy recovery measured in decades, investor interest increasingly favors conversion candidates or top-tier assets with durable rent momentum.AssessmentSan Francisco’s office rebound is no longer theoretical, but it remains sharply divided.Demand is concentrating in newer, amenity-rich buildings, while older stock continues to face elevated vacancy and rent pressure.This split is reshaping pricing, leasing strategy, and investment risk across the market.For landlords and investors, the recovery offers measurable opportunity, but only in select segments.The broader market remains under strain, with performance increasingly tied to building quality, location, and tenant expectations.