REAL ESTATE NEWS

Just two years ago, investors were wary of investing in San Francisco office buildings. The market composition reflected this caution, with private capital accounting for 80% of investment compared to 20% of institutional sources.

Fast forward to today, and a dramatic transformation is taking place, according to a report from JLL. The shift in market composition has institutional capital accounting for 60% to 70% of investment activity.

This perhaps signals a consensus that San Francisco hit bottom at the end of 2023 and is on a path to a strong recovery in 2026.

"San Francisco is currently the second most sought-after market in the country, after New York City, for office investors, and understanding the 'why' behind that will explain why we believe it will become the top investment market in the latter half of the decade," according to Adam Lasoff, managing director at JLL Capital Markets.

The city's investment volume jumped 140% year-over-year. Healthy market fundamentals are driving that significant increase and in turn, capital is chasing growth, according to Lasoff.

"There is ample runway for early investors to capitalize on the reset in pricing from an advantageous cost perspective," he said.

The underlying office market fundamentals paint a clear picture of sustained recovery momentum, according to Alexander Quinn, senior director of Northern California at JLL.

Total availability has declined by nearly three million square feet over four quarters in a market of only 87 million square feet.

"This substantial reduction in available space demonstrates genuine market tightening beyond statistical noise," Quinn told GlobeSt.com.

"Furthermore, the percentage of available space is now lower than the percentage of vacant space, meaning there's less space available for lease than is unoccupied, as tenants fit out their spaces prior to occupancy. The result is vacancy will drop more in 2026."

Perhaps more telling, Quinn said, is that sublease space has decreased by approximately 800,000 square feet and is projected to reach Q4 2019 levels of 2.4 million square feet by year-end 2026, indicating that the oversupply conditions that plagued the market are systematically resolving.

September 2023: Market Hit Bottom

San Francisco hit bottom when the average price per square foot reached its low in September 2023 and the buying pool was mostly all-cash buyers or, in certain cases, seller financing, Quinn said.

The key trade, Quinn added, can be best described as the sale of 550 California Street for approximately $115 per square foot in September 2023. It was purchased in all cash by a high-net-worth buyer. It is now almost entirely leased up, at 335,000 square feet.

While precise pricing varies, deals are now generally running for similar Class buildings in the high $200s or low $300s per square foot, he said.

For example, the Lending Club recently purchased 88 Kearney in an owner-user deal at approximately $318 per square foot in April 2025. This property was renovated more recently, so it is not completely comparable to 550 California.

The market hit "bottom" due to robust remote-work policies among major occupiers in San Francisco, which increased the available supply in the city.

"The vacancy, and specifically the sublease space (an elastic good), jumped dramatically," Quinn said.

An elastic good is one where pricing goes up and down based on market demand.

"You can think of sublease space as a melting ice cube," he said. "The longer you hold onto it, the less it is worth. When there's a lot of sublease space, the result is that overall pricing goes down as the sublease supply undercuts the direct supply.

"Considering the reduction of sublease supply, we see more normal economic play in commercial real estate markets where the full embodied costs are considered in each lease, and landlords have greater capacity to pass their costs with a margin to tenants."

Two Driving Forces for Upswing

San Francisco had the lowest vacancy among major US markets in Q4 2019, before the pandemic before owning the highest in Q1 2023. These downward demand forces have changed.

Two forces are driving the upswing in demand, Quinn highlighted.

A reversal of remote-work policies has shifted the direction of existing tenant demand. Whereas in 2022 and 2023, most office tenants were shrinking their footprints under a hybrid/remote work structure. That has contracted due to increased company policies for in-office participation. It shows up in cell phone location data, the number of BART train exits made Downtown and now in reduced vacancy.

The other is the significant expansion of artificial intelligence firms. The sector's estimated footprint grew from 2.1 million in 2020 to 8 million today. This substantial growth has led to increased support for firms seeking to participate in AI-related firm formation and wealth generation, creating additional demand for AI (e.g., law firms, PR firms, etc.).

Keep in mind that most of the supply in San Francisco was constructed more than 20 years ago. As such, most of the deal activity is in older buildings that have been refashioned with increased amenities.

Newer buildings command higher rents and have lower vacancy than the overall market.

The strongest demand in the city is for just-in-time delivery of space (i.e., plug-and-play), according to Quinn.

"There is a scarcity of built-out space, which is important for many of these start-ups that want to move in within a couple of months," he said. "

"Absorption has been highest among building owners who have invested in and made the time to create occupancy-ready spaces."

A Continuation of the Uptick

The continuation of this uptick is based on two potential dynamics, according to Quinn.

The first dynamic with the reversal of remote work policies is an enduring trend, which is correcting after a strong pullback among tech firms toward going remote," Quinn said.

"That demand story is likely to continue for some time, although we do not see work fully returning to 2019 in-office participation levels," he said.

The second dynamic remains unclear, given that AI adoption is still in the early stages.

"We do know that there are many mid-size AI firms poised to go further," Quinn said.

"While some are likely to fail, the expansion and adoption of AI are still in their nascent stages. So, while there will likely be pullbacks, the long-term demand story points to the expansion of AI and the growth of AI companies, which will, in turn, benefit the office environment."

Source: GlobeSt/ALM