San Francisco Office Leasing Sees Recovery Amid High Vacancy Rates

San Francisco's office leasing market has shown signs of recovery, with a notable 37% increase in leasing activity during the first half of 2026. This uptick is largely attributed to demand from the software engineering sector, where average deal sizes have surpassed 20,000 square feet ¹. This trend suggests a positive shift in the commercial real estate landscape of the Bay Area, even as the market grapples with high vacancy rates.

Despite the increase in leasing activity, San Francisco's office vacancy rate remains stubbornly high, hovering around 30% ². This discrepancy highlights a potential mismatch between supply and demand, indicating that while leasing is improving, the overall market still faces significant challenges due to excess inventory.

In addition to the office market dynamics, there are emerging opportunities for residential development in the Central SoMa area. Kilroy Realty has proposed a plan for the Flower Mart site that could accommodate up to 3,532 homes and feature 600-foot towers ⁴. This initiative reflects a broader trend towards increasing density and mixed-use developments in urban centers, which may help address some of the housing shortages in the region.

On another front, the cost of construction for warehouses in Oakland and the Central Valley has risen sharply, now exceeding $175 per square foot. This makes these areas among the most expensive in the Americas for industrial builds ³. Such rising costs could influence future development projects and investment decisions in the region, potentially impacting the overall commercial real estate market.

In summary, while San Francisco's office leasing market is experiencing a recovery, the persistent high vacancy rates and rising construction costs present ongoing challenges for the commercial real estate sector in the Bay Area. The proposed residential developments may offer some relief, but the market will need to navigate these complexities moving forward.

Sources

1. The Registry (Bay Area) — San Francisco Office Leasing Rises 37% in First Half of 2026 as Engineers Remain Top Recruiting Target
2. The Registry (Bay Area) — Gap Opens Its 2 Folsom Street Headquarters to Bay Area Artists as San Francisco Office Vacancy Hovers Near 30%
3. The Registry (Bay Area) — Oakland, Central Valley Warehouse Costs Top $175 Per Foot as Tariffs Push Industrial Builds Higher
4. The Registry (Bay Area) — Kilroy Pitches Flexible Flower Mart Plan With Up to 3,532 Homes and 600-Foot Towers in Central SoMa