MARKET DRIVERS
The San Francisco Peninsula office market started 2026 relatively slow with uneven demand across submarkets. However, overall conditions began to notably improve during the second half of 2025 after several years of volatility and is expected to continue in 2026. The overall vacancy rate ended 1Q 2026 at 21.9%, still elevated but increasingly stable, as the pace of vacancy rate growth is slowing. The reduction of sublease availability is also encouraging, suggesting that many occupiers have largely completed their initial downsizing and portfolio adjustments.
While declining rent trends persist, they appear close to stabilizing after several years of softening, suggesting that downward pressure may be easing. This trend, combined with improving leasing momentum, supports a positive outlook for the office market in 2026. Strengthening fundamentals in the neighboring San Francisco office market help further reinforce this view, as improved activity in the urban core has historically driven spillover demand into the Peninsula.
From an economic perspective, the Peninsula continues to benefit from its position within the Bay Area’s core innovation economy. Investment in technology remains active, especially across artificial intelligence, cloud infrastructure, and enterprise software, even as hiring growth has slowed. These sectors continue to underpin local office demand, supporting a more stable outlook as companies remain disciplined but engaged in longer-term space planning.
LEASING ACTIVITY
The steady improvement in leasing activity continued during 1Q 2026 with more than 780,000 SF of activity, its highest quarterly total since 4Q 2024. The largest lease transaction was from Roblox for 325,000 at Bay Meadows Station in San Mateo. Recent leasing has been driven by a mix of smaller transactions with an added boost from select mid-sized and larger deals. The flight to quality remains pronounced, while older assets typically face longer lease-up timelines unless repositioned. However, tenants continue to refine their space requirements, leading to negative 313,279 SF of net absorption during the quarter.
Technology remains the primary driver of demand, but with a more focused footprint than in prior cycles. Growth in AI, cloud infrastructure, and digital platforms is supporting leasing interest, particularly along core transit corridors. Large AI commitments elsewhere in the Bay Area, including recent expansions by OpenAI and Anthropic, have reinforced the Peninsula’s role as a strategic extension of San Francisco and Silicon Valley, offering access to talent with greater flexibility and newer inventory. Life Science and MedTech firms continue to add steady demand, while fintech and professional services tenants are rightsizing into efficient, high-quality space.
NEAR-TERM OUTLOOK
The near-term economic outlook for the San Francisco Peninsula is cautiously optimistic. While overall employment growth has moderated, funding for AI, cloud computing, life sciences, and enterprise software remain active, providing a stable base for business spending and office usage. Cost pressures, including housing affordability and operating expenses, continue to influence hiring and location decisions, encouraging firms to remain selective and disciplined. However, access to talent, strong transportation connectivity, and proximity to major tech ecosystems in San Francisco and Silicon Valley position the Peninsula to perform well in the near-term.
The Peninsula office market is positioned for gradual and sustained improvement. Vacancy is expected to trend lower as sublease space is absorbed and converted to direct leases while leasing activity is expected to favor well-located, high-quality assets. While rent growth is likely to remain modest, selective upside is possible for well-located Class A properties as supply tightens and demand becomes more focused. Expansion in the technology and AI sectors is anticipated to drive future demand, complemented by steady growth from the broader employment sectors.
1Q 2026 | PENINSULA OFFICE
1Q 2026 Peninsula Office Market: Key Data Points
Explore our full Peninsula office market review for deeper insights into leasing trends, sale activity, and submarket performance.
- Vacancy Rate Elevated but Stabilizing: Direct vacancy increased to 21.7% in 1Q 2026, a 260 bps rise year-over-year, though the pace of vacancy growth is slowing.
- Leasing Activity Rebounds: Leasing totaled 787,302 SF during the quarter, the strongest quarterly performance since 4Q 2024, led by large technology-driven deals.
- Net Absorption Remains Negative: Net absorption registered -313,279 SF in 1Q 2026 as tenants continue to refine space needs despite improved leasing momentum.
- Asking Rents Continue to Decline: Average asking rents fell to $5.50/SF/month, down 7.5% year-over-year, though rent declines appear to be nearing a floor.
- Construction Pipeline Contracts Sharply: Office space under construction dropped nearly 40% year-over-year to 778,331 SF, helping limit future supply pressure.
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