Economy: Ai Sector Continues To Fuel Improvement
The San Francisco office market improved across all major real estate metrics in the third quarter of 2026, driven largely by the artificial intelligence and machine learning (AI) sector. Demand from AI companies is expected to continue for the foreseeable future, and both the city and region stand to benefit from the full range of companies, from early-stage start-ups to those expected to IPO within the next year. Employment figures improved year-over-year (YOY) for the San Francisco metro division, with total nonfarm employment increasing by 9,800 jobs (0.9%) and the unemployment rate falling 40 basis points (bps) to 3.7%. San Francisco venture capital funding fell to $21.2 billion in the third quarter. The previous two quarters set records, boosted by several large rounds for AI companies.
Supply: Vacancy Rate Continues To Drop
The overall vacancy rate ended the third quarter of 2026 at 29.3%, declining 50 bps from the previous quarter and 410 bps from 33.8% one year ago. This marks the lowest vacancy rate since the third quarter of 2023. Direct vacancy was virtually unchanged from the previous quarter, while sublease vacancy fell to 3.0 million square feet (msf), its lowest level since the beginning of 2020. The availability rate sits at just 27.5%, with the gap largely attributable to the significant amount of leased space awaiting tenant occupancy. Overall absorption remained positive, totaling just over 405,000 sf during the third quarter and nearly 2.9 msf so far this year. This was the sixth consecutive quarter of positive absorption, with the South Financial District and SoMa accounting for the majority of this quarter's gains; San Francisco is on pace for its strongest full year since 2018.
Pricing: Asking Rates Post Largest Increase Since 2020
San Francisco's overall average asking rent ended the third quarter at $72.68 per square foot (psf) on an annual gross basis, up $2.39 (3.4%) from $70.29 psf in the second quarter of 2026. This represents the largest quarterly increase in overall rates since the first quarter of 2020 and takes the figure to its highest level since the second quarter of 2023. In the CBD, Class A asking rents rose to $79.03 psf, while Non-CBD Class A asking rents increased $3.28 quarter-over-quarter (QOQ) to $72.90 psf. Class A Tier 1 assets remained the top performers this quarter, with direct asking rents of $105.52 psf at a direct vacancy rate of just 10.3%.
Demand: New Leasing On Pace For Record Year
In the third quarter, citywide leasing activity (new leasing and renewals) reached 3.6 msf, nearly matching the level of the previous quarter. New deals alone totaled 2.6 msf, representing 72.4% of overall activity. New leasing has totaled just over 9.0 msf so far this year, already exceeding all of 2025 and putting the market on track to break the 10.4 msf record set in 2014.
The flight to quality continued in the third quarter, with Class A properties accounting for 76.7% of total volume, or 2.8 msf. The CBD continued to drive activity, totaling 2.0 msf and representing 55.5% of all deal volume. Activity was led by Amazon’s renewal and expansion at 525 Market Street in the South Financial District and Hinge Health’s relocation to 300 Mission Street for just under 120,000 square feet.
The Non-CBD also captured a significant share of activity, led by several large transactions in SoMa. Sierra AI's 351,000-square-foot renewal and expansion at 185 Berry Street was the largest Non-CBD deal and the largest transaction of the quarter. Other notable transactions included Brex's 198,000-square-foot renewal and expansion at 270 Brannan Street and Cognition AI's sublease of just under 184,000 square feet at 333 Brannan Street. Notably, Amazon, Sierra AI, and Brex each renewed and expanded their space, indicating that companies already operating in San Francisco are growing their footprints.
This momentum reflects the continued strength of AI leasing activity, which has shown no signs of slowing in 2026. AI companies leased just over 4.4 msf through the first three quarters of the year, more than doubling the 2.1 msf leased during all of 2025.
San Francisco recorded 271 active tenant requirements totaling 8.0 msf, up significantly from 7.0 msf one year ago. The tech sector accounts for 61.9% of total demand, up sharply from 49.4% a year earlier, with AI tenants alone representing 29.0% of total requirements.
Sales: Investor Confidence Grows
Office investment sales remained active during the third quarter, led by Flynn Properties’ $221 million acquisition of 225 Bush Street, or approximately $377 psf, through a deed-in-lieu of foreclosure, and Seven Equity Group’s $65.5 million purchase of 875 Howard Street, or approximately $234 psf. Other transactions during the quarter further underscored growing investor confidence in the San Francisco office market, from early-cycle investors realizing substantial gains on their prior purchases to continued owner-user demand for high-quality assets. At the same time, activity remains highly selective, with buyers favoring strong locations, quality, and leasing potential, while value-add buyers continue to target assets available at discounted pricing.
