In 2025, the San Francisco office market continues to show signs of improvement, but not uniform recovery. While vacancy and negative absorption persisted metro-wide, stabilization took root in specific pockets, like the Peninsula and the amenity-rich downtown core. This bifurcation means the key question is no longer about the health of the overall market, but about identifying the resilient submarkets and understanding the drivers, such as location and quality. The market showed its strongest signs of recovery since the pandemic in the second quarter of 2025, which saw leasing activity surge, with nearly 460 office leases signed. That figure is near the city’s average quarterly leasing volume during the 2010–2019 cycle, a decade defined by the rise of cloud technology firms, social media and smartphone adoption.
The Bay Area saw a shift back to in-person work among major employers in the first half of 2025, according to CBRE, which helped support a gradual return of workers, particularly to urban centers. This transition has revitalized certain areas like San Francisco’s Financial District, where rising office occupancy is boosting demand for daytime services. Restaurants and retailers are reopening to serve the growing workforce, signaling a modest recovery in commercial vibrancy.
Artificial intelligence (AI) may be the driving force behind San Francisco’s office revival, but it’s not lifting commercial property equally. With $1.3 trillion in gross regional product, the Bay Area is the 17th largest economy worldwide. Four firms alone exceed $1 trillion in market capitalization. AI firms received $239 billion in VC funding nationally between Q1 2020 and Q1 2025, with 43% going to San Francisco and 28% to other Bay Area firms, per CBRE.
This shift in tenant priorities underscores a broader market signal: flexibility. The label “Class A” is no longer sufficient unless backed by real infrastructure. Buildings that can support high-density operations, hybrid work models, and ESG goals are well-positioned. A flight to quality-driven leasing activity in the Class A and A+ sector has driven rental rates close to 2019 levels, and improving building occupancy. According to Kastle in November of 2025, nationally the Class A weekly average occupancy was 79.3%, compared to 54.8% for their Class B and C counterparts.
Class A and A+ buildings are often located in infrastructure-rich and amenity-dense areas. The discerning sector companies are not just looking for attractive buildings; tenants are seeking capability, power capacity, cooling redundancy, connectivity, and resilient infrastructure. Aesthetic appeal, although still in demand, isn’t enough on its own. Buildings that meet the technical and operational demands of high-performance tenants are the ones seeing traction.
Policy changes in San Francisco are also playing a critical role in shaping the market’s trajectory. New Mayor Daniel Lurie is spearheading a proactive plan that focuses on revitalizing downtown, Union Square, and other business districts that have suffered from the pandemic fallout.
In recent months, the city has adopted reforms aimed at streamlining approvals and reducing costs for developers, removing certain tenant improvement regulations and lowering permit requirements. These reforms are aimed at Class B and C assets, which often lack the infrastructure to compete with Class A buildings. By easing the path for renovations and upgrades, these policy shifts are changing the market faster. This supports the stabilization of the city’s most competitive assets.
New construction is playing a limited role, with new office development at historic lows. Only 6 million square feet is currently under construction. That’s down 84% from 2019, according to CREDaily. This dynamic has implications for both tenants and property owners and managers.
For tenants, the abundance of office space means negotiable terms and flexibility. Class A and A+ options are limited and increasingly competitive. Companies seeking high-performance environments are beginning to act more quickly to secure space in buildings that meet their needs.
For owners, the market presents a turning point; exploring renovations and upgrades, considering infrastructure upgrades, amenity enhancements, and reviewing ESG alignment.
“As assets evolve, and continue to move forward, in the office market, it’s important to be able to have those amenities that tenants like, which employees enjoy, such as a rooftop, a fitness center, car chargers, bike rentals, and walkability to amenities, but from a business-owner standpoint, it’s really important to make sure that you have the ability to get the power you need, the fiber you need, the connectivity you need,” said KBS CEO and Eastern Regional President Marc DeLuca in an interview with Commercial Observer.
This gradual recovery challenges traditional narratives. It’s not about waiting for the entire market to rebound. It’s about understanding where demand is clustering, why certain assets are outperforming, and how policy can accelerate the transition. In this environment, differentiation is key. Buildings that can deliver on infrastructure, experience, and flexibility will thrive.
As we look ahead, the San Francisco office market offers a compelling case study in regional resilience. It’s a reminder that recovery is not always uniform, and that in commercial real estate, the future belongs to the prepared.
Learn more by visiting KBS.com/Insights.
