San Francisco Office Vacancy Drops to 35.1% in Q2 2025 Amid AI Leasing Surge

San Francisco, CA – The beleaguered San Francisco office market is showing significant signs of recovery, with its overall vacancy rate declining to 35.1% in the second quarter of 2025. This marks the third consecutive quarter of improvement, largely propelled by a surge in leasing activity from artificial intelligence (AI) companies. The trend signals growing confidence in the city's commercial real estate outlook, which has been hard-hit since the pandemic.

AI firms have emerged as the primary drivers of this rebound, accounting for nearly 90% of new leasing activity since late 2024. Companies such as OpenAI, Anthropic, Scale AI, Databricks, Rippling, and Sierra are rapidly expanding their footprints. OpenAI, for instance, now controls nearly 1 million square feet across various locations, while Sierra recently tripled its space to 41,104 square feet.

Projections indicate that AI companies could occupy as much as 20 to 21 million square feet of office space in San Francisco by 2030. This expansion is forecasted to potentially cut the city's current vacancy rate in half, a stark contrast to the record-high 37% observed in mid-2024. The influx of venture capital into the AI sector, with nearly half of the $239 billion raised nationally from Q1 2020 to Q1 2025 flowing into San Francisco-based firms, underpins this growth.

The renewed demand is also sparking new development bets and attracting opportunistic investors. Hines, a Houston-based developer, has initiated the city review process for a 1,225-foot office tower, slated to become the tallest building on the West Coast. This ambitious project mirrors Hines' previous successful bet on tech's rise with the Salesforce Tower during the post-recession recovery.

Major investors like Blackstone are acquiring San Francisco office assets at steep discounts, with some properties trading at less than one-third of their 2019 values. For example, Blackstone purchased a 25-story tower at $265 per square foot, and a joint venture led by Greg Flynn acquired Market Center for a 76% discount. These investments reflect a long-term belief in San Francisco's ability to regain its status as a leading innovation hub.

Despite the positive momentum, challenges remain. The current vacancy rate, while improving, is still significantly higher than pre-pandemic levels. Additionally, while AI firms are expanding, their headcounts are generally smaller compared to legacy tech giants, raising questions about the sustainability of the leasing wave without broader job growth. However, city officials, including Mayor London Breed, continue to champion San Francisco as the "AI capital of the world," fostering an environment for continued growth.