INSIGHT

San Francisco Commercial Real Estate: Reading the Signals in a Two-Speed Market

Mark Leverette • July 30, 2026

Industries: Real Estate

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The narrative around San Francisco commercial real estate is no longer a single story. At our most recent Real Estate Forum, led by BPM’s Real Estate Leader Mark Leverette, we brought together brokers, developers, attorneys, valuation specialists, and financial leaders to compare notes on where the Bay Area market is heading.

The picture that emerged is one of divergence: strong sectors pulling ahead, lagging assets under continued pressure, and a set of economic and technological forces that are rewriting the rules for property owners, investors, and developers. If you are making decisions about Bay Area holdings, understanding these crosscurrents is essential to positioning your assets well.

The Economic Backdrop: Growth, Inflation, & the Fed

A senior economist opened the forum with a macroeconomic read that framed the rest of the day. The core message: the fundamentals, as of the date of our event in July 2027, are steadier than the headlines suggest.

• Growth remains solid. The economy is expanding at roughly 2.7% year over year, a healthier pace than many expected.
• Inflation is still above target. Prices are running near 4.2% against the Federal Reserve’s 2% goal, with increases across most categories except automobiles.
• Energy shocks are cushioned. Because the United States is a major petroleum producer, and because energy represents only 7 to 8% of household spending here (versus 15 to 25% in many emerging markets), rising energy costs carry less weight than they once did.

The presenter also pointed to a shifting Fed posture under new leadership, including a renewed focus on bringing inflation back to target and rethinking how it is measured. The outlook: no meaningful interest rate increases planned this year, with the potential for cuts next year if energy pressures ease. For anyone underwriting long-term real estate decisions, the takeaway is to plan around local fundamentals rather than waiting on a single macro signal.

Artificial Intelligence Is Reshaping Demand

No force is reshaping the Bay Area landscape faster than AI in commercial real estate, and its effects cut in more than one direction.

On the demand side, AI hiring is driving renewed interest in both office space and housing, with neighborhoods like Mission Rock feeling the pull on rental demand. As an analogy nationally, data infrastructure have become a major driver of overall space demand, and the country is on track to roughly double its data center capacity from 33 to 77 gigawatts by 2027.

At the same time, the forum surfaced real questions about durability. Some example AI tenants remain underutilized, occupying close to 200 square feet per employee, which creates latent vacancy risk if growth cools. Trophy Class A space is capturing rent increases, but smaller and older buildings are still struggling to compete. The lesson for owners is to look past the momentum and ask how sustainable a given tenant’s footprint really is.

The Office Market’s Uneven Recovery

The recovery in the San Francisco office market is real, but it is not uniform.Premium, amenity-rich buildings in strong locations are outperforming, while assets that do not fit modern workplace expectations continue to lag. That divide shows up in valuations, where certain properties have fallen dramatically from peak pricing, in some cases from around $1,000 per square foot to roughly $250 per square foot.

Transportation access remains part of the equation. BART ridership is still down approximately 50% from pre-pandemic levels despite investments in new trains and turnstiles, and connectivity continues to influence which corridors regain occupancy first. Hospitality and hotel assets, which absorbed some of the sharpest declines during the pandemic, are another reminder that recovery timelines vary widely by asset class.

Development Costs & Conversion Economics

For developers, the math has grown more demanding. Participants expect labor and materials constraints to keep construction costs elevated. Even so, disciplined projects are penciling out. One participant shared details of a Santa Clara development near a major technology campus that achieved construction costs below $600,000 per unit through strategic design decisions and well-timed market entry.

Office-to-residential conversion continues to draw interest as a path to reactivating underused buildings, and downtown San Francisco offers tax increment financing to support it. Adoption has been limited so far, constrained by financing gaps, seismic requirements, and building inventory that does not always lend itself to residential use. Rising rents, however, may improve the economics; several participants expect conversions to become more viable over the next 12 to 18 months.

Workforce Dynamics & the Return to Office

Real estate demand ultimately follows how and where people work. Valuation and brokerage professionals at the forum emphasized the value of in-person work for professional development, mentorship, and relationship building, particularly for colleagues early in their careers. The transition from campus to workplace is not always seamless, and thoughtful onboarding, clear expectations, and intentional in-office time are becoming part of how firms develop their next generation of talent. These workforce choices, made across thousands of Bay Area organizations, are exactly what will shape office demand in the years ahead.

Tax Changes Creating New Opportunities

Recent legislation is opening doors for real estate investors, and our Tax colleagues walked through the provisions that matter most:

• Qualified Opportunity Zones are now permanent, giving investors lasting certainty for long-horizon strategies.
• One hundred percent bonus depreciation has returned, improving after-tax economics on qualifying investments.
• Business interest expense limitations shifted from EBIT to EBITDA, expanding deductibility for leveraged real estate.

Paired with tools like 1031 exchanges and careful entity structuring, these changes can meaningfully improve returns as valuations stabilize.

What This Means for Your Portfolio

The through line across every session was divergence, which means blanket strategies no longer work. As you position for what is next, consider:

• Match assets to demand you can trust. Weigh how durable a tenant’s space needs really are before betting on continued expansion.
• Invest in quality and location. Repositioning and amenity upgrades are increasingly what separate outperforming assets from lagging ones.
• Model conversion carefully. Where financing, structure, and rents align, office-to-residential can unlock stranded value; where they do not, the costs are unforgiving.
• Bring tax strategy into the room early. New provisions can materially change deal outcomes when planned for at the outset rather than after the fact.

Let’s Talk About Your Bay Area Strategy

San Francisco‘s real estate market is rewarding owners and investors who read the specific signals affecting their assets rather than reacting to broad headlines. BPM’s Real Estate advisory team works across the real estate industry with property owners, investors, and developers to navigate market transitions, optimize portfolio performance, and structure transactions around your long-term goals. Contact us to start a conversation about your Bay Area holdings.

Insights shared at BPM’s Real Estate Forum, hosted at our San Francisco office and led by Mark Leverette, Partner and Real Estate Leader.