San Francisco Office Leasing Surges to Post-Pandemic Highs

Leasing activity in San Francisco hit its highest volume since the pandemic, according to first-quarter data from multiple commercial firms. Close to 3 million square feet of office space was leased in the city during the quarter, according to CBRE and Colliers.

More tenants also committed to larger spaces, the brokerages noted, including big renewals and expansions for Google and JP Morgan Chase, as well as substantial new leases for Databricks, law firm Morgan Lewis and Twilio. Of the top 25 deals of the quarter, nearly 60 percent were for tech tenants, according to CBRE, and the vast majority of the rest were for professional and business services.

There were 12 deals over 50,000 square feet last quarter, according to CBRE, the highest since the third quarter of 2021. But overall, the shift to smaller deals continues. In the first quarter, nearly half of all volume came from spaces less than 50,000 square feet, and more than half of transactions were for less than 5,000 square feet, according to Colliers.

First-quarter data shows sublease vacancy declining to 5.7 percent, according to Colliers, its lowest level since the second quarter of 2022. That data also shows effective rents, which include incentives like starting rents and free rent, increased year over year citywide. Given the continued “flight to quality,” it’s no surprise that Class A rents continued to climb, but Class B rents were also higher, rising 9 percent overall and 14 percent in the Financial District in particular compared to the fourth quarter of last year.

Most companies have already optimized the amount of office space they need for their post-pandemic work environment, said CBRE’s regional data head Colin Yasukochi, which means less space is being vacated. Less sublease space coming to market, coupled with new demand from artificial intelligence companies and overall tech in-office mandates, means the city’s vacancy rate is finally on the decline, he said.

CBRE shows positive absorption in the first quarter, though other commercial firms do not, likely because of differing methodologies on determining when net absorption occurs.

CBRE data says vacancy decreased from 36.5 percent at the end of last year to 35.8 percent in the first quarter, with over 250,000 square feet of positive net absorption. Almost all of that was in the South Financial District, which saw over 215,000 square feet of absorption. Gains in the North Financial District put the city’s central business district up by over 357,000 square feet, the largest one-quarter increase in occupancy since the first quarter of 2019.

Tenant demand was down 4 percent from the fourth quarter of 2024, but the data also indicates the total projected net growth of tenants — based on tenants currently in the market for office space who are expected to take more space than they currently occupy, per Yasukochi — in the market in the first quarter of 2025 was at its highest level since 2021.

Winners and losers

Despite real progress in some areas, other neighborhoods lost tenants.

The western portion of SoMa, near Civic Center, continued its decline, according to CBRE. (Colliers puts that loss in eastern SoMa, but that may be attributed to a difference in boundary lines on the adjoining neighborhoods.)

SoMa West saw a negative absorption rate in the first quarter of over 100,000 square feet, which put its total vacancy rate at 65 percent, and at nearly 77 percent for its Class A properties, according to CBRE, Some tenant gains in the area’s Class B/C properties lowered the neighborhood’s overall negative absorption, the only neighborhood in the city where that was the case.

While some sublease space is being converted to direct leases, as in the Twilio deal, others will not be filled before their direct leases are up, which could put financial pressure on owners as those rents stop coming in, Yasukochi said. Just over one-third of sublease space — about 2.3 million square feet — will become direct space in the next two years, according to CBRE.

“We are likely to see more distressed sales in the next 12 to 18 months, some of which may be related to subleases expiring and rent to property owners ending,” Yasukochi said, adding that maturing loans in buildings with large vacancies will also be more difficult to refinance based on the property’s expected income.

More office debt maturities will occur even this year, according to the Colliers report, but many lenders are considering an interim “hold” strategy, given the positive signs pointing toward a leasing market recovery.