Optimism is High in San Francisco and Silicon Valley, but Recovery is Slow in Other Areas

Expectations for a broad office recovery remain cautious, particularly in Southern California, where most respondents to the Winter 2026 Allen Matkins/UCLA Anderson Forecast California Office Real Estate Survey do not anticipate a new development cycle within the next three years. In San Francisco and Silicon Valley, developer sentiment is now optimistic, but in Southern California markets as well as in Sacramento, it’s borderline or pessimistic. Rental growth is expected to remain modest and often below inflation, while vacancy improvements are projected to be gradual and highly market-specific. Although financing constraints persist, capital market conditions show some easing, with lower expected IRR thresholds and more stable equity requirements. Conversion activity is expected to remain minimal, especially in Southern California. Joon Choi, principal, Harbor Associates and Nate Touboul, a partner at Allen Matkins, do a deeper dive into office sector-specific themes for 2026.

What do you see as big demand drivers for the office sector?

Joon: Over the past couple of years in Southern California, aerospace and defense tech have been healthy demand drivers for the South Bay of LA as well as Orange County. The other area where we're seeing good, consistent growth in demand is in medical outpatient services. In terms of industry sectors, the one big drag that we're dealing with right now is entertainment. In the LA entertainment market, a lot of the production jobs have moved out of state, and a lot of post-production has gone remote, which has created a lot of vacancies. AI has definitely been a demand driver in Northern California, driving a big uptick in leasing activity in San Francisco and Silicon Valley.

Nate: Here in the Bay Area as well as in most gateway markets, Class-A, highly amenitized tier one assets in prime locations are generally in a league of their own, commanding historically high rents and low vacancy rates.

Another segment in the Bay Area, particularly in San Francisco, that is doing well is built-out sub 20,000 square foot space that is move-in ready. We are seeing tenants fall within two buckets: Tenants looking for shorter term deals and others looking for longer term deals. Both groups generally have one thing in common — they need the space as soon as possible, which is why built-out space is highly in demand.

Joon, what impact have tariffs had on the office sector?

Tariffs have mostly created uncertainty, but there hasn't been a noticeable impact on construction costs. We're seeing tariffs have an impact on the industrial sector primarily.

Who is investing in office assets right now?

Joon: Last year, we saw a lot more owner-users and private individuals acquiring office, and now we are beginning to see institutions coming back into office, including one asset that we recently acquired — Pasadena Towers, which is a Class A trophy asset in Pasadena. Funds are being raised by institutions where fund managers can do some office within these new funds. We're seeing interest in Class A quality and Class A locations like Pasadena, where we recently invested, Del Mar, and Century City.

Nate, what about purchase and sale activity? Do you see it picking up?

Although we have seen some traditional sales more recently in the office market, our clients are still seeking opportunistic acquisitions via note purchases and deed in lieu transactions. The sharp market rebound that we experienced in the past six months in the Bay Area has increased the pool of potential buyers but has also kept some potential sellers of performing or higher-quality assets on the sidelines, waiting for further improvement.

Are we going to see any uptick in development in 2026?

Joon: We're really not seeing much ground-up development but rather redevelopment where offices, particularly low coverage sites in Orange County, are being demolished for higher and better uses, like residential and industrial.

How is the uptick in the market impacting leasing deals?

Joon: The big trend that we're seeing in office leasing right now is a flight to quality, not only to locations and buildings, but also to landlords. Within even Class-A sub-markets, we're finding that maybe only a third of the buildings can really be competitive and offer the leasing packages, tenant improvement and concession packages that are necessary to get the best tenants. So for tenants, even in markets with elevated vacancy, there are really not that many great options out there, given issues with many landlords in today's market.

Nate: Although landlords were generally eager to sign a deal with any tenant who came through the door during the 2022 to 2024 period, landlords are now starting to scrutinize tenants more, favoring longer-term deals with tenants who can scale within their building rather than signing shorter-term deals.

Are there any other trends you’re keeping your eye on?

Nate: In San Francisco, we see landlords building out standard spec office space because they understand that permitting and building out shell space remains a lengthy process and can be nine to twelve months, and even more depending on the build-out, which is not a feasible timeline for some companies.

Larger, more established companies with a real estate strategy are targeting longer term deals where they can establish a home, build a culture, recruit and benefit from what they see as a rebounding environment that will likely be a landlord market by the time a two- or three-year deal signed today will expire. Newer entrants or earlier stage companies in the Bay Area are prioritizing how quickly they can get into space, with a focus on move-in ready space for two- to three-year terms with the ability to expand, if possible.