MARKET DRIVERS
Positive net absorption and a vacancy rate decline underscore the sentiment felt throughout the Bay Area as office market fundamentals continue to recover. While the improvement has been slow, after a few years of struggle, the positive indicators are a welcome sign. The San Francisco Peninsula market ended 2Q 2025 with 563,420 SF of net absorption, bringing the year-to-date total to 137,770 SF. This was largely influenced by the recent sublease and subsequent move-in by Snowflake (772K SF).
Although full recovery will require a long, sustained period of growth and overall fundamentals remain mixed, cautious optimism persists, and the future remains bright. It is expected to remain a tenants market in the near term, but both occupiers and owners/developers will continue to invest in the future of the Peninsula office market as the market continues to be bolstered by a stable, long-term ownership base. As such, there is a limited number of distressed properties and very few at-risk loans coming due in 2025/2026, unlike other office markets throughout the country.
VACANCY & DEVELOPMENT
The overall vacancy rate decreased slightly during the quarter, ending 2Q 2025 at 24.1% compared to 25.5% last quarter. However, the rate of increase has been decelerating in recent quarters compared to early 2024 and 2023. As a result, both large vacancy and sublease vacancy have been stabilizing with most of the newer spaces coming online being either smaller or mid-sized availabilities direct with the landlord.
Overall, there is more than 9.9M SF of vacant space on the market, 16% of which is available for sublease as tenants continue to right-size their space needs. The trickle-down effect continues to be felt from the shift to a more hybrid and flexible workforce. However, with more and more companies beginning to implement return to work policies, the change is expected to revitalize many markets across the Bay Area. While work from home and hybrid work policies will persist, there is presumed to be a conscious shift to a more balanced workforce.
Speculative development has been significantly slowed due to the lack of pre-leasing activity in recent years coupled with increased construction/financing costs. There is currently 1.5M SF under construction with a mix between tech expansions, mixed-use projects and speculative construction. Of the 936K SF of speculative construction, there has been no preleasing activity to date and all three projects are slated for delivery late summer of 2025.
ECONOMIC LANDSCAPE
The Bay Area, San Francisco and SF Peninsula economies are anchored by the technology industry and currently experiencing tepid job growth, along with a reduction in daytime employment levels due to hybrid employees and remote workers. The unemployment rate for the San Mateo County was 3.4% in May, a slight decrease compared to last quarter and a 30 bps increase compared to last year. However, the labor force participation rate declined versus last year, meaning total employment has fallen to a larger degree than unemployment figures suggest. Recent layoffs from both the Professional and Business Services sector and the Technology sector have driven the majority of job losses during the past year according to the California Employment Development Department.
NEAR-TERM OUTLOOK
Cautious optimism continues to be the theme for both San Francisco and the San Francisco Peninsula office markets. The market has been showing signs of recovery, and many anticipate the market will find solid footing for near-term future growth. If return to work trends persist and employees continue to fill office buildings, the office market will likely shift to recovery and growth sooner than expected.
Lastly, expansion in both the technology and AI sectors is expected to provide a spark for future tenant demand activity, while modest growth across all other sectors will likely assist in filling additional voids in vacancy. A few indicators worth monitoring include return to office employee policies, sublease space levels, future space planning and density levels, leasing and net absorption trends, inflation rates, interest rates, impact of tariffs, the potential occupancy impact from Federal downsizing, and future lender underwriting policy changes.
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