San Francisco Office Market: Signs of Life in a Struggling Sector
At a Crossroads: Stabilization, Not Recovery
The San Francisco office market in mid-to-late 2025 sits at a crossroads. After years of sustained vacancy increases and distressed headlines, the sector is showing signs of stabilization — but only in select corners of the market.
Vacancy: Historically High, Slowly Stabilizing
📊 The Vacancy Reality Check
- •Overall vacancy reached 31.6% in Q2 2025 — seventh consecutive quarter above 30%
- •Direct vacancy holds at 27.1%
- •Total availability measures 37M square feet
✅ The Silver Lining: Sublease Space Declining
- •Sublease space fell to 6.6M SF — a 20% YoY decline
- •Dramatic improvement from 2020's peak when subleases made up over 40% of available inventory
- •What this means: Tenants are either reclaiming space for returning employees or landlords are shifting subleases into direct listings
The takeaway: While supply remains oversaturated, conditions are no longer deteriorating at the same pace.
Leasing Momentum: Strongest Run Since 2018
📈 Volume Recovery
- • Q1 2025: 3.62M SF — highest since 2018
- • Q2 2025: 2.9M SF
- • YTD: 5.7M SF — 50% increase vs H1 2024
🎯 Absorption Turns Positive
- • Net absorption positive for 3 straight quarters
- • Total: 1.1M SF since Q4 2024
- • First sustained positive run since 2019
Tenant Mix Analysis
While small tenants dominate (65% of transactions <5K SF), there has been a 28.8% increase in mid-sized deals (25K–50K SF).
This mix reflects cautious optimism: tenants are still hedging with smaller footprints but mid-sized firms are signaling expansion.
🤖 AI: The Catalyst for Recovery
No sector has had more impact than artificial intelligence.
Historic Demand
- • 5M+ SF leased since 2020
- • 16M SF projected by 2030
- • 800K SF absorbed in H1 2025 alone
Major Deals
- • OpenAI: 626K SF in Mission Bay
- • Anthropic: 247K SF lease
- • Majority of positive net absorption
💰 The Money Behind It: Over $100B in venture capital funding for AI companies since 2020, directly translating into hiring and office demand.
Flight to Quality: A Bifurcated Market
San Francisco's office sector is increasingly two markets in one:
🏆 Trophy/Class A Assets
- ✓Vacancies at 15.3%
- ✓Commanding $73–$103 PSF
- ✓Strong demand for premium "view suites"
📉 Secondary Markets
- ✗Vacancies exceeding 40% in Yerba Buena
- ✗High-30% ranges in SOMA
- ✗Mounting financial distress
The divergence suggests value will concentrate in the premium tier while Class B/C properties either undergo conversion or face ongoing decline.
Investment and Sales Activity
💼 Market Metrics
San Francisco ranks 6th among top 25 U.S. office markets for transaction volume.
⚠️ Distress Remains Pervasive
- •35% of CMBS loans tied to SF office assets flagged distressed
- •Valuation declines of 70–80% recorded (340 Bryant Street, SF Centre)
🏗️ Policy: Conversions as a Lifeline
San Francisco is aggressively pushing office-to-residential conversions:
Scale of Opportunity
- • 1,200 eligible parcels identified across downtown
- • Potential creation of 61,603 housing units
Incentives Package
- • Ministerial approvals
- • Fee waivers
- • Up to 30 years of property tax increment financing
This path offers investors and operators of struggling Class B/C buildings a viable exit strategy, while addressing the city's severe housing shortage.
Outlook: Gradual, Selective Recovery
Looking ahead into 2026, we expect:
Bottom Line
San Francisco's office market remains structurally challenged, but for the first time since 2019, there is a credible case for stabilization. Investors who focus on quality assets, distressed acquisitions, or conversion opportunities stand to benefit most in this transitional cycle.
Our Take
It's still messy. Vacancy will probably hang above 30% into 2026. But — absorption is finally positive, sublease space is shrinking, and AI + RTO mandates are giving real demand back to the city. If rates cool a bit, this could be the start of a (very uneven) recovery.
Curious what others here think — real rebound or just a temporary sugar high?
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Subscribe to DealsletterThe San Francisco office market represents both the challenges and opportunities of modern commercial real estate. While vacancy remains elevated, the combination of AI-driven demand, policy support for conversions, and stabilizing sublease inventory suggests the worst may be behind us. Smart investors are already positioning for the recovery — the question is whether you'll join them.