REAL ESTATE NEWS

The third quarter could be the sign of a recovery for the San Francisco office market, as JLL reported a preliminary positive absorption of close to 450,000 square feet, driven by an increasing number of move-ins from smaller firms and a couple of reoccupations from tenants.

This brings the vacancy rate close to 35.4%, roughly a 30-basis point improvement quarter-over-quarter and there are tentatively a large number of move-ins set to start next quarter.

“The 35 percent uptick in office space demand was surprising,” Chris Pham, senior analyst at JLL, told GlobeSt.com.

“We thought it would remain flat or see modest gains as office requirements are met.”

Tenant requirements have increased by nearly three million square feet since the start of the year, bringing the total close to 9 million square feet.

“The fact that requirements jumped this much is a positive sign, whether it is to be closer to the AI ecosystem or from increased positive sentiment,” he said.

“We anticipate positive absorption to continue for at least two quarters, and potentially beyond Q1-2026, as long as demand remains strong from both a leasing and office demand perspective, as leasing tends to lag vacancy rates by two quarters.”

Pham said that all recent signs – from increased touring activity, an increase in return to office numbers and an uptick in leasing activity – favor this.

SoMa’s (South of Market) neighborhood is standing out for tourists, according to the report.

Moreover, Companies supporting the AI ecosystem are particularly leasing space, from venture capital to law firms new to the market, with some wanting to return to San Francisco and others lured by the plentiful AI talent.

Some 83 AI companies have leased a total of one million square feet through three quarters, and it appears that JLL’s initial projection of 1.2 to 1.5 million square feet could be exceeded by year’s end.

Public transportation BART train exits during peak morning hours are up roughly 10% year-over-year, a sign that more are returning to the office.

Tenants Challenged to Lease High-Quality Offices

CBRE reported that San Francisco’s Q3 office vacancy rate declined to 34.6% in Q3 2025, down from 34.8% in Q2 2025 and 36.9% in Q3 2024 (peak vacancy).

It said tenants are facing challenges when seeking higher-quality office spaces.

“Despite the large quantity of available space, a large portion requires substantial tenant improvements or is in less desirable locations,” according to Colin Yasukochi, executive director of CBRE’s Tech Insights Center.

Rents for the highest quality buildings are equal to or higher than pre-pandemic levels, while other building prices have decreased by 20% or more.

“The better-quality buildings with ‘nearly’ ready to occupy space are valuable because tenant improvement buildouts are very costly and time-consuming, Yasukochi said.

“Rapidly growing tech and AI firms prefer this type of space as it meets their business needs.”

CBRE recorded that AI firms accounted for 20% of 7.4 million square feet of year-to-date leasing activity.

“There are 40 AI tenants in the market seeking tow million square feet of space, and 1.4 million square feet is expected to be for new growth,” he said.

AI-based tech talent in the San Francisco Bay Area increased by 24% from last year despite slower tech job growth overall, according to CBRE’s 2025 Scoring Tech Talent Report.

Meanwhile, the Bay Area received about three-quarters of US AI venture capital funding since 2019, data from Pitchbook shows.

Source: GlobeSt/ALM