Is San Francisco's Office Market Actually Recovering in 2026?
San Francisco's office market is experiencing a genuine, data-backed recovery after years of post-pandemic contraction, though the story is far from uniform across building classes and submarkets. The city's vacancy rate fell by 3.7% during 2025, the largest annual decrease since 2011. Leasing activity is projected to reach 12.8 million square feet in 2026, representing 15% year-over-year growth. And net absorption turned positive in Q4 2025 for the first time since Q4 2019.
The recovery engine is unmistakable: artificial intelligence. AI companies leased 2.5 million square feet in San Francisco during 2025 and now occupy approximately 7 million square feet, representing roughly 12% of the city's total occupied office space. Anthropic's 420,000 square foot lease at 300 Howard Street in January 2026 signals continued momentum. San Francisco captured 14 of the largest U.S. office leases by square footage in 2025, with 10 signed by tech companies.
Yet the recovery is deeply bifurcated. Trophy buildings maintain vacancy around 14%, while non-prime buildings sit at 43%. This gap creates both risk and opportunity for investors seeking office financing in a market where asset selection determines everything.
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What Office Loan Programs Are Available in San Francisco Today?
The lending landscape for San Francisco office properties has evolved dramatically since 2022. Traditional bank lenders have retreated from office exposure, while alternative lenders, debt funds, and selective institutional capital providers have stepped in with products designed for the current market reality.
For stabilized, well-leased office buildings (80%+ occupancy with credit tenants), conventional financing remains available through banks, life insurance companies, and CMBS lenders. Rates range from 5.75% to 7.00% depending on tenant quality, lease term, and building class. Maximum leverage has compressed to 55% to 65% LTV, down from the 70% to 75% common before the pandemic.
Bridge loans dominate the transitional office market, providing 12 to 36 month terms for acquisitions of vacant or partially leased buildings. Rates range from 8.00% to 12.00%, with leverage of 55% to 65% of current value. These loans give borrowers time to execute lease-up strategies, complete tenant improvements, or prepare properties for conversion.
SBA 504 loans offer an attractive path for businesses acquiring office space for their own use. With up to 90% loan-to-value, below-market rates on the CDC portion, and 20 to 25 year terms, SBA financing makes owner-occupancy in San Francisco's discounted office market more accessible than at any point in recent memory.
For office-to-residential conversions, specialized construction and heavy bridge lenders provide the capital structure. These loans typically require detailed architectural feasibility studies, approved entitlements, and experienced development sponsors.
How Is AI Reshaping Office Demand and Financing in San Francisco?
The artificial intelligence sector's office-first culture is the single most important factor in San Francisco's office market recovery. Unlike remote-friendly software companies that drove the previous tech cycle, AI companies require physical proximity for collaborative research, hardware infrastructure, and the rapid iteration that defines the industry. This has created sustained, growing demand for office space concentrated in San Francisco proper.
AI companies accounted for 2.8 million square feet of office demand in 2025, representing 35% of total leasing activity. The sector's footprint has expanded to 7 million square feet, and companies are actively seeking larger blocks of contiguous space to support ambitious expansion plans. This demand profile favors buildings that can accommodate 50,000+ square foot tenants with modern infrastructure, high power capacity, and proximity to other AI firms.
For lenders and investors, AI-tenanted buildings represent the most financeable segment of the office market. Properties leased to well-capitalized AI companies (many backed by billions in venture funding) command the tightest cap rates and most favorable loan terms. Lenders evaluate AI tenant credit based on funding runway, revenue trajectory, and the strategic importance of the lease to the tenant's operations.
However, the concentration of demand in a single sector creates risk that sophisticated lenders price into their underwriting. A building 100% leased to AI tenants benefits from strong current cash flow but carries sector concentration risk. Diversified tenant rolls that include AI, professional services, and life sciences typically receive more favorable underwriting than single-sector properties.
What Does the Vacancy Picture Look Like Across San Francisco's Office Submarkets?
The overall office vacancy rate of 34.8% masks enormous variation across building classes, locations, and quality levels. Understanding this segmentation is essential for both investment strategy and loan underwriting.
Trophy buildings (the city's newest, most amenity-rich properties) maintain vacancy around 14%, driven by AI tenant demand for premium space. These buildings feature modern HVAC systems, high power density, flexible floor plates, and the amenity packages (fitness centers, rooftop terraces, food halls) that today's tenants expect. Financing for trophy office is readily available from life companies and banks at competitive terms.
Prime Class A buildings show vacancy around 25%, reflecting the flight-to-quality trend that has moved tenants from older buildings into newer stock. These buildings are financeable but require careful tenant rollover analysis, as upcoming lease expirations can dramatically change the risk profile.
Class B and C buildings face the most challenging conditions, with vacancy rates of 35% to 43%. Many of these properties will never return to their prior office use. Instead, they represent the inventory from which conversion opportunities (residential, life sciences, flex) will emerge. Financing for these assets falls squarely in the bridge loan and value-add category, where lenders underwrite to the borrower's repositioning plan rather than current cash flow.
Sublease availability has declined 30% year-over-year to 5.4 million square feet, the lowest level since early 2020. This declining sublease inventory is a leading indicator of market tightening, as it suggests companies are either reoccupying previously subleased space or allowing subleases to expire and return to direct availability.
What Cap Rates and Pricing Should Office Investors Expect?
Office pricing in San Francisco has undergone a historic repricing that creates both opportunity and complexity for investors and lenders. The gap between trophy and secondary office valuations has never been wider, and the metrics used to evaluate deals vary significantly across the quality spectrum.
Trophy and well-leased Class A office buildings trade at cap rates of 5.5% to 6.5%, reflecting the stable cash flow from credit tenants and the limited supply of premium space. These cap rates have compressed from 2023 levels as investor confidence in the AI-driven recovery has grown. Twenty-six office sales closed in San Francisco in 2025, totaling $2.3 billion, with several trophy transactions setting new benchmarks for post-pandemic pricing.
Class B office buildings with partial occupancy trade at cap rates of 7.5% to 10.0%, with pricing heavily dependent on in-place occupancy, lease rollover schedule, and capital expenditure requirements. These properties are typically priced at $200 to $400 per square foot, compared to $600 to $900+ pre-pandemic.
Distressed and vacant office buildings have traded at prices as low as $100 to $200 per square foot, or 50% to 70% below replacement cost. At these basis levels, conversion to residential or alternative uses becomes economically feasible, particularly with the city's incentive programs reducing development costs.
Lenders pricing office loans factor in not just current cap rates but also the trajectory of the recovery. Properties with momentum (rising occupancy, active tenant negotiations) receive more favorable terms than those still searching for tenants.
How Are Office-to-Residential Conversions Financed in San Francisco?
San Francisco has positioned itself as a national leader in encouraging office-to-residential conversions through a comprehensive package of incentives, though the financial feasibility remains challenging for many buildings. Understanding the financing structure is essential for borrowers considering conversion projects.
The city's incentive package includes elimination of affordable housing fees for conversions (enacted March 2025), waiver of transfer taxes on office-to-housing conversions (Proposition C), creation of a downtown revitalization financing district, and streamlined permitting through the Downtown Adaptive Reuse Program.
Despite these incentives, conversion costs typically range from $300 to $500 per square foot, comparable to new construction. The primary cost drivers include structural modifications (adding plumbing stacks, reconfiguring floor plates), mechanical upgrades (residential-grade HVAC, kitchen ventilation), code compliance (fire separation, egress, accessibility), and finish work (kitchens, bathrooms, flooring).
Financing for conversions typically involves two phases. The acquisition and predevelopment phase is funded by a bridge loan at 60% to 65% LTV on the as-is value, providing capital to purchase the building, complete feasibility studies, and secure entitlements. The construction phase is funded by a construction loan at 60% to 70% of total project cost, disbursed in draws as work progresses.
Lenders evaluating conversion projects assess the building's structural suitability (narrow floor plates convert more easily than deep plates), the sponsor's conversion experience, the target residential market (luxury versus affordable), and the projected stabilized value relative to total cost.
What Refinancing Challenges Face San Francisco Office Owners?
The commercial real estate maturity wall presents acute challenges for San Francisco office owners with loans originated during the pre-pandemic era. Properties financed at 2018 to 2020 valuations and interest rates face a radically different landscape at refinancing, with both values and cash flow significantly impaired.
The core challenge is the gap between the existing loan balance and current property value. An office building financed at 65% LTV on a $50 million valuation in 2019 carries a $32.5 million loan balance. If the same building is now worth $25 million, the owner faces a $7.5 million shortfall even before accounting for today's lower leverage standards. This negative equity position has driven much of the distressed activity in the market.
Borrowers facing maturity have several options. Loan extensions or modifications with existing lenders, sometimes called "extend and pretend," buy time for the market to recover but often require cash infusions. Discounted payoffs allow borrowers to settle the existing loan at below the outstanding balance, either from personal resources or new bridge financing. New equity from partners or investors can cure the shortfall and recapitalize the property.
For properties with viable long-term potential (strong location, good building bones, convertibility), refinancing into a new loan at current values, combined with fresh equity, can preserve the investor's position and participation in the recovery upside. The commercial mortgage calculator can help you model refinancing scenarios at various value assumptions.
What Due Diligence Issues Are Unique to San Francisco Office Properties?
San Francisco office properties present several due diligence considerations that affect both acquisition underwriting and loan qualification. Lenders experienced with the local market factor these issues into their analysis, while less experienced lenders may struggle with the complexity.
Seismic risk evaluation is mandatory for virtually all San Francisco office transactions. The city's proximity to the San Andreas and Hayward faults, combined with the age of much of the office stock, means that Probable Maximum Loss assessments, structural engineering reviews, and seismic retrofit cost estimates are standard due diligence items. Unreinforced masonry buildings and soft-story structures require particular attention.
Building systems assessment takes on heightened importance in older San Francisco office buildings. Many of the Class B and C buildings driving the vacancy crisis suffer from outdated HVAC systems, insufficient electrical capacity for modern tech tenants, and deferred maintenance. The cost to modernize these systems can range from $30 to $80 per square foot, significantly affecting the total investment basis and loan sizing.
Tenant rollover analysis requires granular attention in a market where lease expirations can dramatically change a building's risk profile. Lenders examine not just the weighted average lease term but the credit quality of each tenant, the probability of renewal, and the mark-to-market on each lease (whether the in-place rent is above or below current market).
Environmental assessments follow standard commercial protocols but warrant extra attention for buildings in SoMa and the Financial District's landfill areas, where soil conditions and historical contamination may affect development or conversion plans.
What Strategies Work Best for Financing San Francisco Office Acquisitions Today?
The optimal financing strategy for San Francisco office acquisitions depends entirely on the property's position on the quality spectrum and the investor's business plan. One-size-fits-all approaches fail in a market with this much variation between asset types.
For trophy and well-leased Class A acquisitions, conventional bank or life company financing provides the best terms. Target 55% to 65% LTV with 5 to 10 year terms, negotiate rate locks to protect against rising rates, and ensure the loan includes flexibility for tenant improvement funding. These properties support permanent financing because of their stable, credit-worthy cash flow.
For value-add Class B acquisitions targeting lease-up, bridge financing provides the right structure. The key is to secure a bridge loan with sufficient term (24 to 36 months including extensions) to execute the lease-up plan, combined with a capital reserve for tenant improvements. In San Francisco's current market, tenant improvement allowances of $80 to $150 per square foot for new office leases are standard, and the bridge loan should account for this cost.
For distressed acquisitions targeting conversion, the financing structure must bridge from acquisition through entitlement and into construction. Some lenders offer bridge-to-construction programs that consolidate these phases, simplifying the capital structure and reducing friction costs.
Regardless of strategy, San Francisco office acquisitions require experienced sponsors, conservative leverage, and realistic timelines. Lenders are willing to finance office deals in this market, but they demand clear business plans and demonstrated competence from borrowers. Contact the Clear House Lending team to discuss office acquisition financing strategies.
What Is the Long-Term Outlook for San Francisco Office Investment?
The long-term outlook for San Francisco office investment is cautiously optimistic, supported by structural drivers that distinguish the city from other struggling office markets. Understanding these fundamentals helps investors and lenders make informed decisions about committing capital to the sector.
AI sector growth provides the most powerful tailwind. Unlike previous tech cycles, AI requires physical concentration of talent and infrastructure, creating durable demand for office space in the city where the industry is most concentrated. With AI investment continuing to accelerate globally, San Francisco's position as the world's AI capital supports sustained office demand growth.
Supply reduction is another positive factor. Limited new construction (the pipeline has slowed dramatically) combined with the conversion of obsolete office space to other uses will gradually reduce the available inventory. As supply contracts and demand grows, the vacancy rate should trend downward over the next several years.
Two major developers have proposed new skyscrapers in San Francisco, with Hines planning the city's tallest new building at 77 Beale Street and Related Companies targeting a 41-story tower at 530 Sansome Street. These projects signal institutional confidence in the market's direction and will add premium inventory for AI and tech tenants.
The risk factors remain real. A downturn in AI funding, a shift back to remote work, or a broader economic recession could stall the recovery. Investors should underwrite conservatively, maintain adequate reserves, and structure loans with flexibility to weather potential setbacks.
Visit our San Francisco commercial loans guide for ongoing market analysis and financing resources.
Frequently Asked Questions
Can I get a loan for a vacant office building in San Francisco?
Yes, but financing options for vacant office buildings are limited to bridge loans and certain debt fund products. Conventional lenders (banks, CMBS, agency) require stabilized cash flow and will not finance vacant properties. Bridge lenders will finance vacant office acquisitions at 55% to 65% of current value, provided the borrower presents a credible lease-up plan or conversion strategy and has relevant experience. Rates for vacant office bridge loans typically range from 9% to 12%.
What cap rates are lenders using to underwrite San Francisco office deals?
Lenders apply different cap rates depending on building quality. For trophy and well-leased Class A office, lenders underwrite at 5.5% to 6.5% cap rates. For Class B with partial occupancy, underwriting cap rates range from 7.5% to 9.0%. For distressed or vacant buildings, lenders focus on the as-is value rather than income-based cap rates, using comparable sales and replacement cost analysis.
Are SBA loans available for owner-occupied office space in San Francisco?
Yes, SBA 504 loans are an excellent option for businesses purchasing office space for their own use. With up to 90% LTV, below-market fixed rates, and 20 to 25 year terms, SBA financing takes advantage of San Francisco's discounted office pricing. The business must occupy at least 51% of the space. Given that Class B and C office space is available at $200 to $400 per square foot (down from $600+), SBA loans make owner-occupancy more affordable than at any time in recent memory.
How do lenders evaluate AI company tenants for office loans?
Lenders assess AI tenant credit based on total funding raised, revenue growth trajectory, burn rate relative to cash reserves, the strategic importance of the lease (headquarters versus secondary office), and the overall financial backing (whether backed by major venture firms or strategic investors). Well-capitalized AI companies with over $500 million in funding and multi-year cash runways receive treatment similar to investment-grade tenants in many lender models.
What is the typical loan term for San Francisco office financing?
Stabilized office properties typically receive 5 to 10 year loan terms with 25 to 30 year amortization. Bridge loans for transitional office properties carry 12 to 36 month terms with extension options. SBA 504 loans offer 20 to 25 year terms. Construction loans for conversion projects run 18 to 36 months. The right term depends on your investment strategy and the property's position in the stabilization cycle.
Should I buy or lease office space in San Francisco right now?
With office prices at historic lows (50% to 70% below replacement cost for Class B/C), purchasing can make strong economic sense for businesses planning to stay in San Francisco long-term. SBA financing at up to 90% LTV makes the capital requirement manageable. Purchasing locks in your occupancy cost, builds equity, and eliminates exposure to future rent increases. Contact the Clear House Lending team to compare the economics of buying versus leasing for your specific situation.