MARKET DRIVERS
The San Francisco Peninsula office market demonstrated meaningful signs of stabilization in the latter half of 2025, despite vacancy levels that remain historically high. At year-end, overall vacancy stood at 21.7%, with direct vacancy slightly lower at 20%. Approximately one-fifth of available space is still listed for sublease, underscoring the ongoing recalibration of workplace strategies as hybrid work models persist.
While fundamentals have strengthened, rental rates have largely plateaued following several quarters of softening. At the end of 4Q 2025, full-service asking rents for Class A and Class B properties generally ranged from the mid-$5 to mid-$6 per square foot per month, reflecting a market that is steady but competitive.
Demand dynamics improved notably during the second half of the year. The Peninsula recorded positive net absorption for three consecutive quarters, after beginning the year with negative activity (-425,650 SF) in 1Q. For the year, the market posted 457,197 sf of net absorption in 2025, with the second (563,420 SF) and fourth quarters (208,737 SF) delivering the strongest gains.
Leasing activity was characterized by a mix of smaller transactions and select mid-sized and large occupancies. The “flight to quality” remained a defining trend, with Class A and newly delivered projects capturing approximately 60% of annual leasing volume. In contrast, older properties continued to face longer marketing cycles and subdued demand unless repositioned to meet evolving tenant expectations.
Development activity remains steady. Following a handful of completions in 2025, approximately 1.3M SF is currently under construction, primarily tied to build-to-suit commitments or phased mixed-use projects. Speculative ground-up starts have been constrained by higher financing costs, tighter underwriting standards, and limited pre-leasing, which has helped temper vacancy rate pressure and prevent oversupply.
KEY INDUSTRIES DRIVING RECOVERY
Technology continues to anchor demand, though with a more selective footprint. Growth in AI, cloud infrastructure, and digital platforms fuels requirements for collaborative, high-quality space near transit corridors such as Caltrain and US-101. Life sciences and MedTech firms are adding steady requirements, often seeking flexible layouts and robust connectivity. Fintech companies are rightsizing into efficient footprints, while professional services and nonprofit organizations provide consistent demand for smaller, accessible spaces. Emerging sectors such as climate tech and clean energy are also contributing to incremental activity, favoring ESG-forward buildings.
NEAR-TERM OUTLOOK
Economic projections for the San Francisco Peninsula and broader Bay Area are cautiously optimistic heading into 2026. The region’s economy, anchored by its premier position in AI and innovation, is expected to outperform the national average, driven by robust tech investment and business spending. However, the forecast is also tempered by headwinds including tariff volatility, high living costs, and potential constraints on consumer and small business spending.
The Peninsula office market is well positioned for gradual improvement in 2026. Vacancy is expected to trend downward as sublease inventory converts to direct leases, and new construction remains constrained. Leasing will continue to favor well-located Class A assets offering premium amenities, outdoor space, and sustainability features, while older properties may require significant upgrades or alternative uses to remain competitive. Rent growth is projected to be modest overall, though select trophy assets could see incremental gains as the flight to quality persists.
Expansion in technology and AI sectors is anticipated to drive future demand, complemented by steady growth in life sciences and professional services sectors. Key indicators to monitor include return-to-office trends, sublease absorption, leasing velocity, and macroeconomic factors such as interest rates and lender underwriting standards. Collectively, these dynamics set the stage for a measured and sustainable recovery in the year ahead.
4Q 2025 Peninsula Office Market: Key Data Points
Explore our full Peninsula office market review for deeper insights into leasing trends, sale activity, and submarket performance.
- Direct Vacancy Rate at 20.0%: Up 250 basis points year-over-year, reflecting ongoing hybrid work adjustments.
- Overall Availability Declines: rate dropped to 21.7%, down 190 basis points from Q3.
- Average Asking Rent at $5.77/SF/Month: A 4.7% decrease year-over-year, signaling competitive pricing.
- Positive Net Absorption: 208,737 SF absorbed in Q4, contributing to 457,197 SF for the year.
- Leasing Activity Strengthens: SF leased in Q4, with Class A assets capturing 60% of annual volume.
- Construction Pipeline Contracts: 1.29M SF under construction, down 9.2% year-over-year, mostly build-to-suit projects.
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