MARKET DRIVERS
The Bay Area office market continues to show incremental signs of recovery, supported by positive net absorption and relatively stable vacancy rates. Although the pace of improvement remains uneven, recent activity reflects a welcome shift following several years of disruption. The San Francisco Peninsula office market recorded 111K SF of positive net absorption in Q3 2025, bringing the year-to-date total to 248K SF, marking the second consecutive quarter of growth. Central and North Counties led performance with 180K SF and 61K SF of positive absorption, respectively.
While a full recovery will require sustained momentum and strengthening fundamentals, market sentiment remains cautiously optimistic. The Peninsula continues to benefit from a stable ownership base, which has helped mitigate distress and limit exposure to at-risk loans maturing in 2025 and 2026. As a result, both occupiers and investors remain committed to the long-term viability of the region’s office sector, even as the market remains tenant-favorable in the near term.
VACANCY & DEVELOPMENT
The San Francisco Peninsula office market is adapting to ongoing shifts in workplace strategy, with over 10.2M SF of vacant space currently available. Approximately 20% of this inventory is listed for sublease, reflecting continued efforts by tenants to recalibrate space needs in response to hybrid and flexible work models. While these dynamics have contributed to elevated vacancy levels, the gradual rollout of return-to-office policies is expected to stimulate demand across the Bay Area.
Despite positive absorption, the overall vacancy rate rose slightly to 24.7%, up from 24.2% in the previous quarter, primarily due to new deliveries entering the market with unleased space. Conversely, the direct vacancy rate declined to 19.4%, down from 20.0%, indicating modest stabilization. Much of the new inventory consists of small to mid-sized availabilities offered directly by landlords, rather than large-scale sublease blocks.
Speculative development remains limited, constrained by low pre-leasing activity and rising construction and financing costs. As of Q3 2025, 1.7M SF was under construction, after 575K SF of deliveries during the quarter. Notable completions include two buildings at ELCO Yards in Redwood City totaling 327K SF, and 1350 Gundy Lane, a 248K SF building leased to YouTube. Projects currently underway include a mix of tech expansions, mixed-use developments, and speculative office space.
ECONOMIC LANDSCAPE
San Mateo County’s economy remains fundamentally strong in 2025, supported by robust property valuations and strategic public investment. The local job market continues to show resilience, with an unemployment rate of 4.3% and the highest wage growth among California’s large counties. While office vacancy remains elevated at 24.7%, consistent positive absorption suggests a gradual recovery is underway.
The county’s employment base is dominated by the service sector, though green jobs and technology roles—particularly in AI and adjacent industries—are gaining momentum. Venture capital activity remains a key driver of innovation, with over $35B invested across more than 300 funding rounds in recent years. Local institutions such as SamCERA continue to support growth-stage VC funds, reinforcing San Mateo County’s role as a cornerstone of the Bay Area’s innovation ecosystem.
NEAR-TERM OUTLOOK
The San Francisco Peninsula office market is expected to maintain a trajectory of cautious recovery. While remote and hybrid work arrangements remain prevalent, a gradual shift toward a more balanced in-office workforce is underway. If this trend continues, increased physical occupancy could accelerate the market’s transition to sustained growth.
Expansion in the technology and AI sectors is anticipated to drive future tenant demand, while modest growth across other industries may help absorb remaining vacancies. Key indicators to monitor include: return-to-office policies, sublease inventory levels, space utilization and density strategies, leasing velocity and net absorption, inflation and interest rate trends, tariff impacts and federal downsizing, changes in lender underwriting standards.
3Q 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 Declines Slightly: The Peninsula’s direct office vacancy rate fell to 19.4%, down from 20.0% last quarter but up 190 bps year-over-year.
- Asking Rents Trend Downward: Average asking lease rate decreased 5.3% YOY to $5.72 PSF FSG.
- Net Absorption Turns Positive: Q3 posted 111K SF of positive net absorption, with 248K SF YTD.
- Construction Activity Surges: 1.77M SF is currently under construction, a 61.8% increase YOY.
- Leasing Volume Slows: YTD leasing activity reached 1.7M SF, down 6.2% compared to the prior year.
- Sales Volume Jumps: Office sales totaled 1.63M SF YTD, a 146% increase year-over-year.
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