INSIGHT

What’s Behind San Francisco’s Office Market Upturn? Here’s A Closer Look

May 28, 2026

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San Francisco occupies a peculiar position in the national commercial real estate conversation right now. By one measure, it leads the country: tenant demand for office space hit an all-time high in 2025, surpassing every other major U.S. market. By another, it remains one of the most challenging office markets in the country, with roughly a third of all space still sitting empty. 

Both things are true. And understanding which story applies to your situation depends entirely on where you sit in the market. 

Where Things Stand 

The headline vacancy number requires some context before it tells you anything useful. San Francisco’s office vacancy peaked at 36.9% before gradually beginning to recede, a long fall from the pre-pandemic low of 4.7% recorded in Q2 2019. The descent has been slow and uneven, but the direction has shifted. 

Full-year 2025 leasing activity reached 11.0 million square feet, surpassing the 10 million square foot annual threshold for the first time since 2017 and representing a 66.7% increase over 2024. Net absorption, the difference between space being leased and space being vacated, turned meaningfully positive in the second half of the year, with Q4 2025 producing 824,000 square feet of positive absorption. For a market that spent years hemorrhaging tenants, that is a notable shift. 

The nuance is that these gains are not evenly distributed. The overall market improvement masks a sharper story playing out at the submarket and asset-class level, which we will get to shortly. 

The AI Factor 

The force behind the recovery is not a mystery. AI companies leased 2.5 million square feet in San Francisco in 2025 alone and now occupy 7 million square feet citywide, roughly 12% of total occupied office space in the city. Active tenant demand hit a record 7.9 million square feet in Q3 2025, with AI firms accounting for 35% of that pipeline. 

The capital behind those tenants is staggering in scale. The San Francisco Bay Area has captured approximately 80% of the $578 billion in AI venture capital deployed nationally since 2019, and that concentration of funding is translating directly into office demand. The largest players have made their footprints visible: OpenAI now occupies nearly 1 million square feet across multiple buildings, and Anthropic recently expanded its presence by an additional 100,000 square feet. 

JLL research director Alexander Quinn captured the shift in sentiment well, telling the San Francisco Business Times that the narrative around San Francisco has changed, with the expectation of an AI economic revolution leading tenants across industries to want to plant a flag in the city. 

The Two-Market Reality 

Here is where the picture gets more complicated. The recovery is real, but it is concentrated, and the gap between the winners and the rest of the market is widening. 

Trophy office vacancy in San Francisco sits at a fraction of the overall market rate, with Class A asking rents at $71.38 per square foot and trophy space commanding $103.95 in Q3 2025, compared to $57.41 for Class B. The Transamerica Pyramid illustrates the dynamic in concrete terms: following a $1 billion renovation, vacancy dropped from 50% to 33.8% and rents now range from $155 to $300 per square foot, placing it among the three most expensive office addresses in the United States. Global law firm Morgan Lewis signed a 123,000-square-foot lease there, leaving its longtime home at One Market Plaza where it had been paying $115 per square foot. 

At the other end of the market, the picture is considerably less encouraging. Landlords of less competitive properties are offering up to two months of free rent per lease year, with tenant improvement allowances reaching $225 per square foot, more than double the $100 that was typical in 2019. That level of concession reflects the difficulty of filling space that cannot compete on quality, location, or amenities. 

What AI Tenants Actually Want 

The AI-driven recovery is also reshaping what landlords need to offer, and it does not look like the leasing cycles of the past. 

Unlike the enterprise tech giants of the previous decade, which filled traditional towers with long-term leases, today’s AI tenants tend to be younger, faster-growing, and considerably more particular about the kind of space they occupy. As BXP President Doug Linde noted during an earnings call, AI demand is not a tower business. These companies want shorter lease terms, move-in-ready suites, and flexible floor plates that can accommodate rapid headcount growth. SoMa’s low- and mid-rise buildings, with their adaptable layouts and proximity to engineering talent, have become the neighborhood of choice. 

Landlords who have moved fastest to meet that demand are seeing results. Kilroy Realty pre-built speculative suites before signing a tenant, a strategy that paid off with a 93,000-square-foot lease with Harvey AI. The sublease market is also thinning: much of the former inventory from Zendesk, Meta, and others has been absorbed, which means the next wave of AI leasing will happen through direct landlord deals rather than discounted subleases, a meaningful shift for pricing and terms. 

The Policy Picture 

City Hall has been more active than at any point since the pandemic in trying to accelerate the market’s recovery. 

Mayor Daniel Lurie’s administration has pushed through reforms that have reduced permitting timelines from years to approximately 90 days and introduced financial incentives for office-to-residential conversions. The Downtown Revitalization Financing District, signed into law in 2025, targets approximately 1,200 eligible parcels across the central business district for potential conversion, reinvesting property tax increases to offset development costs. 

On the supply side, new office construction has come to a near-complete halt. San Francisco has now gone six consecutive quarters without a new office groundbreaking, which, while a reflection of the market’s lingering uncertainty, also means the supply overhang is not getting worse. The Potrero Power Plant development is expected to break ground within the next several quarters, with completion projected for 2028. 

What This Means for San Francisco Businesses 

The market’s current dynamics create distinct implications depending on your position. 

For tenants, elevated overall vacancy means negotiating leverage still exists, but the window for accessing premium space at favorable terms is narrowing as AI-driven demand competes for the same Class A and trophy inventory. If securing high-quality space in a desirable submarket is a priority, waiting is becoming a less advantageous strategy. 

For property owners and investors, the bifurcation between premium and commodity office space is likely to deepen before it resolves. Buildings that can meet the technical and operational demands of high-performance tenants, power capacity, cooling redundancy, strong connectivity, and flexible layouts, are the ones attracting interest. Those that cannot are competing primarily on price, and that is a difficult position to sustain. Renovation and repositioning decisions made now will determine which side of that divide a property ends up on. 

For the broader business community, the return-to-office trend is strengthening, with San Francisco ranking third nationally for year-over-year office visit growth in early 2025. That has downstream effects on retail foot traffic, hospitality demand, and the general health of the urban core that extend well beyond the commercial real estate sector itself. 

Turning a Corner, But Not the Whole Building 

The recovery underway in San Francisco’s office market is genuine, but it requires careful interpretation. The headline vacancy rate and the trophy vacancy rate are describing two different realities, and the distance between them is growing. 

Sustained, market-wide improvement will depend on the AI demand wave broadening beyond its current concentration in premium submarkets, legacy tech tenants stabilizing their footprints rather than continuing to right-size, and conversion activity meaningfully reducing supply on the lower end of the market. All of those things are in motion. None of them are complete. 

San Francisco is no longer in freefall. Whether it is in recovery depends on which floor you are standing on.