Why smart money is betting big on San Francisco's office market turnaround

SAN FRANCISCO, Mar. 4, 2026 – Just two years ago, investors were wary of investing in office buildings in San Francisco. The market composition reflected this caution, with private capital accounting for 80% of investment compared to 20% from institutional sources. Fast forward to today, and we're witnessing a dramatic transformation. The shift in market composition shows institutional capital accounting for 60-70% of investment activity and signals a consensus that San Francisco has hit bottom and is positioned for recovery.

“San Francisco is currently the second most sought after market in the country, after New York City, for office investors and understanding the ‘why’ behind that, will explain why we believe it will become the top investment market in the latter half of the decade,” said Adam Lasoff, Managing Director, JLL Capital Markets. “San Francisco investment volume jumped 140% year-over-year. Healthy market fundamentals are driving that significant increase and in turn capital is chasing the growth. There is ample runway for early investors to capitalize on the reset in pricing from an advantageous cost perspective.”

This institutional migration represents more than just market sentiment, it reflects capital recognizing economic data articulating the recovery in San Francisco. Institutional buyers are securing assets at a significantly lower cost basis relative to previous cycles, while benefiting from increasingly healthy leasing fundamentals that provide strong downside protection and meaningful upside potential. This strategic positioning allows these investors to capitalize on the market's recovery trajectory. Often termed ‘asymmetric risk,’ investors have increasing clarity on the downside loss, yet recognize there’s higher upside due to positive office occupancy gains, return to office trends, and growing demand due to massive investments being made into artificial intelligence, which is uniquely concentrated in the Bay Area.

The underlying office market fundamentals paint a clear picture of sustained recovery momentum. Total availability has declined by nearly three million square feet over four quarters in a market of only 87 million square feet. This substantial reduction in available space demonstrates genuine market tightening beyond statistical noise. Furthermore, the percent of available space is now lower than the percent of vacant space, meaning there’s less space available for lease than is unoccupied as tenants fit out their spaces prior to occupancy. The result is vacancy will drop more in 2026.

Perhaps more telling, sublease space has decreased by approximately 800,000 square feet and is projected to reach Q4 2019 levels of 2.4 million square feet by year-end 2026, indicating that the oversupply conditions that plagued the market are systematically resolving.

The quality of leasing activity further underscores the market's fundamental improvement. Many of the larger leasing transactions completed in 2025 were expansion-focused, implying positive net absorption moving forward. This represents a marked shift from 2024, when large deals were predominantly renewal-focused, suggesting tenants were simply maintaining status quo rather than growing their footprint. This transition from defensive positioning to growth-oriented space planning reflects improving business confidence and operational expansion plans.

Market dynamics are translating into tangible pricing power, with net effective rates climbing as demand pushes down the quality spectrum from top-tier office space, which has achieved full occupancy, to Tier 2 assets. This flight-to-quality migration is a trend that has played out nationally over recent years but is just now manifesting in San Francisco's market. With no new development scheduled to come online over the next four years and top-tier space completely leased, investors are strategically focusing on Tier 2 assets that, with targeted capital improvements, can command some of the market's highest rental rates. The recent recapitalization of 300 Howard in the South Financial District that received a long-term full building lease is a good example of a Tier 2 asset able to recapitalize and compete for these growing AI companies.   

San Francisco's emergence as the undisputed artificial intelligence capital has provided additional tailwinds for the office market recovery. The city captured a record $134 billion in venture capital funding during 2025, representing 27% of global VC investment, also a historical high. Approximately 80% of this funding flowed to just 10 AI companies, though 513 AI companies received funding citywide, (PitchBook, January 2026). This capital influx translated directly into space absorption, with San Francisco recording the highest number of AI-related leases of any city globally at 143 transactions encompassing approximately 2.0 million square feet. Notably, nearly 80 of these were new-to-market or newly founded companies, demonstrating organic growth rather than simple relocations. These metrics exceeded 2024's previous record of 104 leases totaling 1.1 million square feet, illustrating accelerating momentum. San Francisco AI firms have already signed another six new deals in 2026 totaling over 500,000 square feet bringing the total active AI leases to 260 and over 7.5 million square feet, a growth rate of 28%/year since 2020. 

The convergence of improving fundamentals, institutional capital deployment and technology sector growth is positioning San Francisco as one of the top two target cities for office investment among institutional investors in the year ahead. Investors are drawing parallels to New York City's explosive performance throughout 2025, recognizing how pent-up demand systematically flowed through that market once recovery conditions solidified. San Francisco appears poised to mirror this growth trajectory, with similar underlying dynamics creating comparable opportunities for outsize returns.

The investment thesis extends beyond short-term recovery plays. The remainder of 2026 and the coming decade promise to restore San Francisco to normalized market conditions, but with the advantage of having undergone a comprehensive market reset. This unique combination of distressed entry points coinciding with fundamental improvement creates an asymmetric risk-return profile that institutional capital is actively pursuing. For investors positioned correctly, San Francisco's office market represents not just recovery potential, but the opportunity to participate in the next expansion cycle from an advantaged cost basis established during the market's most challenging period.

JLL (NYSE:JLL) is a leading global commercial real estate services and investment management company with annual revenue of $26.1 billion, operations in over 80 countries and a global workforce of more than 113,000 as of December 31, 2025. For over 200 years, clients have trusted JLL, a Fortune 500® company, to help them confidently buy, build, occupy, manage and invest across a variety of industries and property types, including office, industrial, hotel, multi-family, retail and data center properties. Driven by our purpose to shape the future of real estate for a better world, we help our clients, people and communities SEE A BRIGHTER WAY. Powered by rich global datasets and leading technology capabilities, we provide coordinated, end-to-end delivery of real estate services for a broad range of global clients who represent a wide variety of industries. Through LaSalle Investment Management, we invest for clients on a global basis in both private assets and publicly traded real estate securities. For further information, visit jll.com.