Few cities can boast a comeback story like San Francisco. After years of challenges since the pandemic, it is safe to say a new chapter in San Francisco’s history is being written, and AI is at the center of it.
San Francisco is the epicenter of AI capital, capturing roughly 54 percent of global AI and machine learning venture capital funding in 2026. Nearly all of VC funding is tied to AI and machine learning (98 percent). San Francisco–based companies alone attracted approximately $281.5 billion of venture capital funding through 3Q 2026, dwarfing every other North American market. Funding is concentrated with 86 percent of all rounds through 3Q into four companies. Moving forward, expect more VC concentrating with the robotics/advanced manufacturing sector of AI with San Francisco getting a significant share of that.
The knock-on effects for the commercial property markets are materializing. AI companies account for 29 percent of tenant requirements for office space, and total office demand is 8.0 million square feet, up from 7.0 a year ago. New leasing is on pace for a record (10.4 million square feet was recorded in 2014), absorption has been positive in seven of eight quarters, and sublease space is down 60 percent from its 2024 peak. Vacancy is 29.3 percent, down from a 34.7 percent peak, and asking rents rose 3.4 percent in the quarter to $72.68/square foot, the highest since 2023. Of note, the availability rate in San Francisco is now less than the vacancy rate with the delta being 180 basis points at 3Q 2026. Further, once tenants move into space they have already leased, the vacancy rate would fall to almost 25.0 percent.
The office recovery is narrow. Top-tier CBD towers are 13.4 percent vacant versus 35.2 percent for the bottom tier, and Mission Bay is 8.5 percent vacant at $125.70/square foot, the most competitive submarket in both the city and country.
On the multifamily side, the recovery is just as pronounced as that of office, but the depth is not narrow. Since 2020, the market has whipped from a 6.5 to 7 percent vacancy rate to 14 percent, to now rest at 3.2 percent, a near record but only for the year 2000 when it hit a 1.8 percent low. Though around 3,900 units are under construction, there have been no deliveries for three straight quarters and rent growth has accelerated to 15.6 percent year-over-year, a trend that appears to be likely to continue. A little goes a long way—population-wise, the losses from 2020–2024 have abated, but the city is not adding to its population meaningfully.
Trophy capital is back, and office investment is ratcheting up as evidenced by the purchase of roughly 47.5 percent of 101 California for about $450 million, the city’s largest office deal in four years, and the Transamerica Pyramid, which sold for $692 million, near $933/square foot. These deals reflect a broader acceleration: year-to-date, office sales are $3.8 billion, trending at a roughly $5.7 billion year if the pace continues. Already, the deals transacted through 3Q surpass the annual volumes reached in all years since 2022. Multifamily is posting record sales volume. Through August, the $5.8 billion sold is nearly double its prior 2024 record of $3.2 billion.
Unlike most other top markets, mixed-use development is forthcoming, but it isn’t the core driver of the market momentum now. No office space is under construction, but 20 million square feet is planned, led by developments such as Mission Rock, Pier 70, Potrero Power Station, 50 First Street, and 200 Mission Street. Instead, San Francisco is demonstrating a pattern that has repeated throughout its history: transformative innovations tend to rebuild the city long before cranes appear on the skyline.
The retail sector is staging a comeback as well. What started as improvements within the neighborhoods (thanks, in part, to work from home) is now expanding into the CBD and Union Square, as conferences, tourism, and return-to-office all take hold. Safety and security has been front and center with the new city administration and the change is palpable, though still imperfect. Luxury boutiques have expanded along with numerous high-street/fast-fashion retailers, many of which left San Francisco during the pandemic. Bars and restaurants have also been in growth mode over the past year, many catering to the tech workforce. There remain issues, especially around what to do with the former San Francisco Centre on Market Street, just south of Union Square. Bids were received in September with a decision to be made before year’s end on who will get to decide its fate.
—Cushman & Wakefield
