MARKET DRIVERS
After showing signs of life during the back half of 2024, the San Francisco Peninsula office market started the year slow with -425,650 SF of net absorption and only 320,451 SF of leasing activity during the quarter. Although there continues to be a long path to a sustained recovery period and overall fundamentals remain soft, cautious optimism persists, and the future remains bright. While it will remain a tenants market in the near term, both occupiers and owners will continue to invest in the future of the Peninsula office market. In fact, the market continues to be anchored by a stable, long-term ownership base that is able to withstand the various market challenges since the pandemic. As such, there is a limited number of distressed properties and very few at-risk loans coming due in 2025, unlike other office markets throughout the country.
VACANCY & DEVELOPMENT
As expected with negative net absorption, the overall vacancy rate increased during 1Q 2025, rising to 25.5% compared to 24,9% last quarter and 21.5% at the same time last year. However, it important to note that 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.
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 2.1M SF under construction with a mix between tech expansions, mixed use projects and speculative construction. Of the 1.2M SF of speculative construction, there has been no pre-leasing activity to date and all three projects are slated for delivery late summer of 2025.
ECONOMIC LANDSCAPE
Economic uncertainty remains across the Bay Area, with lukewarm job growth, increasing unemployment and elevated interest rates. While the technology sector will continue to drive the future recovery in the Bay Area, there appears to be a current lull in sector growth as many firms have paused to see how the economy will take shape in 2025. This wait and see approach will likely delay growth for the San Francisco Peninsula office market. There has also been a limited amount of new start-up activity on the Peninsula, indicating a pause in economic and entrepreneurial growth – which is expected to be a short-term trend. With that said, the overall economic outlook is relatively positive for 2025. And after a subdued couple of years, there has been a recent uptick in both venture capital funding and M&A activity – both long standing drivers of the Peninsula office market. If this trend continues, it should bode well for future growth.
NEAR-TERM OUTLOOK
Even though a full office rebound appears to be a considerable distance away, cautious optimism is already taking shape for 2025 in hopes the market will find solid footing for mid-term future growth. With many new proposed policies being discussed at the national, state and local levels which include tariffs, decreased corporate taxes, and deregulation it has become difficult to project the impact on commercial real estate in 2025. 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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