REAL ESTATE NEWS

San Francisco's commercial real estate market in September 2026 shows an overall steady recovery, but office is on another level, driven largely by artificial intelligence tenants and selective capital inflows.

Its office market has not fully recovered, but it is the only major gateway market showing improvement, according to the National Association of Realtors (NAR).

Office vacancy rates are down from more than 23% in early 2025 to about 20% now. Net absorption has turned positive and asking rents are also moving up, the NAR said.

Vacancy rates have declined from a peak of 36.7% in early 2025 to roughly 27% to 30%, depending on methodology. This was supported by more than 7.7 million square feet of leasing in the first half of 2026 and 2.19 million square feet of positive net absorption, the strongest first-half performance on record since before the pandemic, according to BNP Paribas Real Estate (BNP).

AI is emerging, with companies in the field occupying nearly 14% of leased office space. Plus, their expansion has diversified demand beyond a handful of headline deals, creating momentum across multiple submarkets, according to BNP.

Prime asking rents have risen above $77 per square foot annually, reflecting landlords' regained pricing power in high-demand spaces, though Class B and C properties remain under pressure with elevated vacancy and weaker rent growth, BNP found.

Investment activity has also strengthened, with more than $1 billion in office investment sales recorded in the first half of 2026, including a landmark $600 million transaction at 600 Montgomery Street, signaling renewed investor confidence despite high borrowing costs and looming loan maturities, BNP reported.

Premium Office Space Highlights San Francisco Recovery

CBRE has also provided insight into San Francisco CRE, describing the market as stable and even. The recovery is concentrated in premium office and multifamily assets tied to the AI-driven innovation economy, while older properties and debt-laden holdings face persistent stress, the CRE said.

The city's ability to sustain this rebound will depend on continued AI growth, return-to-office momentum and resolving financing challenges in the coming quarters.

On San Francisco's other CRE asset classes, Nadia Evangelou, principal economist and director of real estate research at NAR, said multifamily continues to perform well, with high occupancy and strong rent growth; retail has been relatively stable, while industrial is more mixed.

NAR's CRE Demand Index, which assesses markets' real estate wholly, suggests more improvement ahead.

San Francisco's score is at 93, up about seven points from a year ago, although still below the average US metro.

"Looking at each sector, retail has the strongest demand drivers right now, followed by industrial," Evangelou said.

"Office is improving, but its demand drivers are not there yet. Multifamily demand is also being held back by slower population growth and migration.

Source: GlobeSt/ALM