San Francisco Real Estate Recovery in Mid-2025: Sector Insights and Policy Shifts

San Francisco’s real estate landscape is navigating a pivotal phase in mid-2025. After several turbulent years, the market is showing early signs of stabilization and recovery, albeit unevenly across sectors. This report – from the perspective of a feasibility advisory firm – examines current conditions and recovery signals in four key sectors (Office, Multifamily Residential, Retail, Industrial) and discusses recent leadership and policy changes shaping the city’s outlook. The tone is cautiously optimistic: while challenges remain, emerging trends and policy initiatives point toward a gradual revitalization. Below, we break down each sector’s status with data-driven insights, and then explore how new leadership and rezoning efforts may influence San Francisco’s real estate trajectory over the next 6–18 months.

Office Market: High Vacancy Meets Renewed Demand

Current Conditions: San Francisco’s office market is slowly rebounding from its pandemic-era downturn. Leasing activity has accelerated through late 2024 and early 2025, reaching its highest volumes since early 2022. Tech firms – particularly in the booming artificial intelligence (AI) sector – have led this leasing uptick by expanding into quality spaces freed up by earlier tenant contractions. Notably, companies like OpenAI, Anthropic, and Databricks have all signed large leases for space in San Francisco in recent quarters. This new demand has helped offset the remote/hybrid work-induced drop in occupancy that hit San Francisco harder than any other major office hub.

Market Stats: Despite improving leasing momentum, the office vacancy rate remains historically high at 22.8% as of Q2 2025. This is up slightly (about 60 basis points) from a year prior, and starkly higher than the ~5.9% vacancy of 2019 before the pandemic. In total, roughly 50 million square feet of office space is available citywide, including 9.3 million square feet listed for sublease – a legacy of companies downsizing. Top-tier office towers are especially underutilized: Class 4 & 5 Star buildings face a 27.2% vacancy rate, exerting upward pressure on the overall vacancy. On the pricing side, asking rents have fallen about 30% from their 2019 peak and now average $50–$51 per sq. ft.annually across all classes. The good news is that rent declines have slowed markedly – year-over-year rent growth stands at -1.7% (essentially flat) in Q2 2025, hinting at approaching rent stabilization. Another positive indicator is absorption: over the past 12 months net absorption was effectively flat at -14,000 sq. ft., a dramatic improvement from the -6.5 million sq. ft. annual net absorption recorded in 2023. In fact, gross absorption of office space surpassed 3.5 million sq. ft. in Q1 2025, the highest quarterly volume in four years. Construction of new offices has virtually halted – only 1.3 million sq. ft. is under construction, mostly life-science oriented projects – reflecting developer caution amid high vacancies.

Demand Drivers & Headwinds: The office demand that does exist is being driven by San Francisco’s evolving tech economy. AI and biotech firms are fueling much of the new leasing, attracted by high-quality (and often discounted) sublease space that came on the market during the downturn. Major commitments by firms like Google (which renewed over 550,000 sq. ft. in early 2025) and law firm Morgan Lewis (which took 123,000 sq. ft. in the Transamerica Pyramid) underscore that there is still confidence in select locations and properties. On the other hand, structural headwindspersist. Remote and hybrid work has permanently reduced the baseline demand for office space, especially in downtown high-rises. Many companies already downsized their footprints in 2022–2023, and while that wave is easing, a few continued move-outs are occurring as pre-pandemic leases expire (e.g. recent space give-backs by LendingClub and Okta). The sheer scale of excess space – including subleases – will take time to backfill. Elevated vacancy, particularly in older or less amenity-rich buildings, also deters investment and new development. Indeed, brokers agree that outside of specialized life-science projects, new speculative office construction will be rare in the coming years.

Signs of Recovery/Restructuring: Despite the challenges, there are clear signals that the office market may have hit bottom and is slowly turning a corner. The pace of vacancy increase has slowed significantly compared to the steep rises of 2020–2022. Total available space has even ticked down slightly over the past year – a subtle but important sign of nascent re-absorption of excess inventory. Landlords report growing sentiment that an inflection point is at hand, expecting key indicators like absorption, vacancy, and rent to stabilize and start improving in upcoming quarters. The deal activity in late 2024 and early 2025 – including 20-year lease commitments and large tech expansions – hints at long-term confidence from certain tenants. Moving forward, the office sector’s recovery will likely involve restructuring of underperforming assets: we anticipate more building renovations and potential conversions (for instance, some obsolete offices may be repurposed to laboratory space or even housing, aided by new city incentives). Overall, the office market’s trajectory in the next year will be defined by a slow grind of absorption as the city’s tech-driven growth (AI, life sciences) fills some of the void, while landlords and policymakers explore creative reuse for the most vacant properties.

Multifamily Residential: Demand Resurgence and Tightening Vacancies

Current Conditions: In stark contrast to the office sector, San Francisco’s multifamily residential market is mounting a robust recovery in 2025. After a period of pandemic-era outflow and soft demand, renters are returning and absorption has surged. The first quarter of 2025 saw the largest expansion in apartment demand in four years, and momentum remained strong into Q2. This upswing coincides with a return to population growth for San Francisco: after several years of decline, the city’s population stabilized and even notched a modest increase in 2024, which has bolstered apartment demand. Market observers attribute the turnaround to a combination of factors – renewed hiring (especially by AI and tech firms), improving downtown safety conditions, and the simple fact that many who left during the pandemic have either come back or been replaced by new arrivals. Neighborhoods that were hard-hit by remote work and civic issues (homelessness, street crime) – such as parts of Downtown and Civic Center – are showing tentative improvement, suggesting that city initiatives to improve livability are having an effect.

Market Stats: Apartment occupancy has tightened dramatically over the past year. The vacancy rate has fallen to 5.1%as of Q2 2025 – the lowest level in San Francisco in over a decade. For context, vacancy peaked near 10–11% in late 2020 during the height of urban out-migration; today’s 5.1% is even lower than pre-pandemic 2019, indicating a full recovery in occupancy. Net absorption over the last 12 months hit approximately 3,700 units, matching the annual demand levels of the city’s pre-pandemic boom. This demand has outpaced the limited new supply: relatively few new multifamily projects have delivered in the past year (fewer than 1,000 units were added over 12 months), allowing excess vacancies to be absorbed rapidly. Tightening supply-demand conditions are translating into rising rents. Citywide asking rents are up about 4.9% year-over-year as of Q2, one of the fastest growth rates among major U.S. markets. In fact, the average apartment rent in San Francisco has just surpassed its 2019 peak in nominal terms. Effective rents (net of concessions) have similarly climbed, and landlords are regaining pricing power after the rent declines of 2020–2021. By property class, the luxury segment (4 & 5 Star), which saw vacancies skyrocket during the pandemic, has rebounded significantly – its vacancy rate has dropped to 8.5% (down from nearly 20% in 2020) as high-income renters return to the city. Mid-market and workforce apartments (3 Star and below) remain the tightest, with sub-5% vacancy across Class 3, 2, and 1 properties.

Demand Drivers & Headwinds: Several tailwinds are fueling the multifamily resurgence. Employment growth in San Francisco’s resurgent tech sector (especially AI) is attracting new residents and boosting household formation, directly increasing apartment demand. Additionally, population inflows – whether young professionals moving in or former residents returning – have resumed now that the city is perceived to be stabilizing economically and addressing quality-of-life concerns. Local officials’ efforts to curb open-air drug use and improve public safety in key neighborhoods have made urban living more attractive than it was a couple of years ago. Another important driver is the cost of homeownership: with Bay Area home prices still high and mortgage interest rates around their highest in over a decade, many would-be buyers are remaining renters. This dynamic keeps rental demand robust, since renting is the only feasible option for a large portion of the workforce given the barriers to buying in San Francisco’s housing market. On the supply side, one headwind is the slow pace of new construction. While the city has an ambitious housing pipeline on paper, groundbreakings have been limited by economic conditions, high construction costs, and lengthy approvals. Developers have entitlements for thousands of units – for example, in the South of Market area alone, over 5,000 units are approved and awaiting better market conditions – but many projects are paused until financing and cost dynamics improve. Thus, new supply remains constrained, which in the near term actually supports landlords by limiting competition. A potential medium-term challenge would be if interest rates decline and stalled projects break ground en masse; however, any large wave of deliveries is at least a couple of years out. For now, the primary headwinds for multifamily are macroeconomic – if a recession or tech slowdown hits, renter demand could soften again – but currently all signs point to strength.

Signals of Recovery & Resilience: The apartment sector’s fundamentals underscore resilience and a sharp recovery. Absorption turning positive across all asset classes (even the previously struggling luxury high-rises) indicates broad-based demand returning. The rapid decline in vacancy back to historically low levels in just a two-year span highlights how quickly the market absorbed the pandemic shock. Moreover, rent growth has returned without any significant concessions needed, showing that landlords have regained confidence in the leasing environment. Importantly, even neighborhoods that saw the greatest pandemic-era stress – such as Downtown/SOMA, or areas like the Tenderloin which experienced social challenges – are now seeing occupancy improve month by month. This suggests that public and private efforts to revitalize the urban core (improved policing, new neighborhood investment) are positively impacting the residential sector. With new leadership at City Hall pushing to accelerate housing production (more on that below), the long-term outlook is constructive: policy support for more housing could eventually ease the affordability crunch, but in the next 6–18 months, limited new supply and a rebounding population mean the multifamily market is likely to remain tight. Landlords can expect continued high occupancy and moderate rent growth in the near term, barring any major economic hiccup.

Retail: Stabilization After a Downtown Shakeout

Current Conditions: San Francisco’s retail sector is emerging from a prolonged slump and showing tentative signs of stabilization in mid-2025. The past two years were exceptionally challenging for retail landlords – pandemic aftershocks led to diminished foot traffic, waves of store closures, and rising vacancies, especially in the Downtown and Union Square areas. By 2023-2024, the city’s once-bustling central retail districts experienced high-profile closures (from department stores to small shops) due to the combined impacts of remote work, lost tourism, and public safety concerns. However, the tide is beginning to turn. In late 2024, leasing activity started picking up and net absorption turned modestly positive for the first time in years. This positive momentum has carried into the first half of 2025 as retailers cautiously expand or backfill some vacant spaces. While conditions are still far from pre-pandemic norms, the worst of the retail contraction appears to be over.

Market Stats: Citywide retail vacancy stands at about 6.1%, which is relatively moderate – but this masks a sharp divergence between the downtown core and outlying neighborhoods. In the Downtown/Union Square submarkets (which make up roughly a quarter of the metro’s retail inventory), availability rates have soared into the low teens, reflecting a glut of empty storefronts. As of early 2025, downtown San Francisco’s retail availability is ~13.6%, compared to just 3–5% in many neighborhood shopping districts and suburban parts of the metro. The most extreme case is the Union Square area’s indoor malls: the exit of anchor tenants Nordstrom and Bloomingdale’s has left the Westfield San Francisco Centre (“Emporium”) nearly vacant, pushing the downtown mall availability up to 26.9%. By contrast, community-oriented retail centers outside the core have largely maintained healthy occupancy. Over the past year (Q2 2024 to Q2 2025), net absorption for the overall market crept into positive territory at roughly +140,000 sq. ft.. Essentially all of those gains occurred in non-downtown areas, offsetting ongoing losses in the city center. Rent trends mirror this tale of two markets: Overall asking rents are roughly flat to slightly up (+0.9% YoY), but that average hides a 4% drop in downtown rents versus stability (or slight growth) in the neighborhoods. The citywide average asking rent is about $44/sq. ft. per year, and landlords in prime suburban corridors have held rents steady, whereas downtown landlords have had to offer concessions and lower rates to lure tenants. New retail construction is almost nonexistent – San Francisco has long had limited retail development due to land constraints and a shift toward e-commerce; true to form, no significant retail projects delivered in the past year and only minimal square footage is under construction as of mid-2025.

Demand Drivers & Headwinds: Retail demand in San Francisco hinges on the return of people and spending power to formerly empty areas. Office workers and tourists are critical to downtown retail – their absence during the pandemic crushed many businesses. Now, incremental improvements in office attendance (as more employees adopt hybrid schedules) and a rebound in tourism are gradually bringing life back to central shopping streets. Additionally, a structural shift in consumer behavior is at play: even though San Francisco boasts high household incomes, much of that spending migrated online or to neighborhood commercial districts in recent years. Residents working from home are more likely to patronize local shops and restaurants in their own neighborhoods, which is why smaller retail nodes in residential areas have fared better. This shift is a double-edged sword: it has weakened downtown but strengthened neighborhood retail. Going forward, one driver for downtown could be the city’s efforts to improve safety and cleanliness – reducing crime and blight is essential to lure shoppers back, and the data suggests some progress on this front, as publicized efforts to address open-air drug markets and street conditions coincide with the stabilization of retail occupancy. Still, significant headwinds remain: e-commerce is a formidable competitor (structurally limiting demand for brick-and-mortar retail), and downtown’s recovery is tied to uncertain variables like the future of office work and conventions. Moreover, the rash of store closures created a perception challenge; it takes time for new tenants to backfill empty flagship stores, and some national retailers are still hesitant on San Francisco. In sum, retail demand is rebuilding, but it faces a long road and will likely look different than before (more experiential, food/beverage and local-serving retail, less traditional big-box).

Emerging Signals: Encouragingly, the retail market’s recent trajectory suggests resilience and adaptation. The fact that overall occupancy has leveled off and even improved slightly is a significant achievement following eight consecutive years of net negative absorption (2015–2022). It appears that the “bottom” of the retail cycle hit in 2023, and tenant interest is now reappearing for well-located spaces at the right price. Smaller retailers and service businesses are stepping into some vacancies, capitalizing on lower rents. Additionally, there is a flight to quality within retail – the best-located streetfronts (e.g. Chestnut Street, Valencia Street, etc.) continue to attract tenants, whereas secondary locations might remain empty longer. The stability in neighborhood retail performance demonstrates the sector’s inherent strength in serving local demand; these districts have been a bedrock of resilience, benefiting from residents spending more of their dollars close to home. Looking ahead, the retail sector is likely to see restructuring and repurposing in the downtown core. Large vacant properties like the nearly-empty Westfield Centre will require creative solutions – possibly redevelopment into mixed-use or non-retail uses – to address the oversupply of traditional retail space. City leaders are actively discussing incentives for adaptive reuse of underutilized commercial buildings. Overall, the next 6–18 months should bring gradual improvement: expect a few more national or concept retailers to cautiously re-enter the downtown market (as lease terms become favorable), and continued strength in neighborhood retail, all contributing to a modest drop in vacancy by year-end. Rental rates in the aggregate are projected to inch up again by 2026 if these trends hold.

Industrial: Mixed Signals in Logistics and Life Sciences

Current Conditions: San Francisco’s industrial sector (which includes warehouses, distribution facilities, and flex/R&D spaces) is experiencing a bifurcated trend in mid-2025. Overall demand softened in 2023, leading to rising vacancies, but there are now early signs of a rebound in certain segments. The story differs for traditional logistics space(warehouses for storage and distribution) versus flex space (often life science labs or tech R&D facilities). In 2024, high interest rates and ebbing pandemic-era consumption caused many logistics tenants to scale back – leasing activity in the warehouse segment dropped ~25% compared to 2023. As a result, move-outs outpaced move-ins significantly, and by the end of 2024 the logistics side of the market was in correction. At the same time, the flex sector faced its own challenges: a wave of new laboratory/R&D buildings hit the market just as biotech leasing demand pulled back sharply (venture funding for biotech dried up with rising rates). This combination led to a spike in flex vacancies even though some new buildings were build-to-suit (pre-leased). Entering 2025, however, conditions are slowly changing. Both Q4 2024 and Q1 2025 saw increased leasing volumes. In late 2024, flex/R&D leasing surged to its highest quarterly total since mid-2022 (~750,000 sq. ft. leased in Q4). And in Q1 2025, the logistics segment also recorded its strongest quarter of leasing since 2023, with about 650,000 sq. ft. of deals signed. These improvements suggest that tenants have started to capitalize on softened rents and greater availability to secure space.

Market Stats: Across all industrial and flex properties in the metro, the vacancy rate has climbed to 13.2% as of Q2 2025. This is a substantial increase from roughly 6–7% vacancy a couple of years ago, reflecting how the market loosened. The pain is not evenly distributed: the flex submarket now posts a hefty 23.0% vacancy, an outcome of rapid supply growth and faltering demand in life science hubs. By contrast, pure logistics/warehouse space – often in areas like South San Francisco, Brisbane, and the Peninsula – has around 8.7% vacancy. While that logistics vacancy rate has roughly doubled from ~4% in 2022, it remains far below the flex segment’s oversupply. One bright spot is specialized industrial (e.g. manufacturing facilities), which remain scarce; this segment’s vacancy is only about 5%. Over the past 12 months, net absorption of industrial space was approximately -360,000 sq. ft. (negative), indicating more space was vacated than leased overall. Drilling down, this net loss is entirely due to the warehouse sector: logistics properties saw a -910,000 sq. ft. occupancy loss, whereas the flex sector actually achieved a +510,000 sq. ft. net gain in the past year. That apparent positive in flex absorption is somewhat misleading – it reflects new projects delivered already pre-leased or occupied by owners (built-to-suits), rather than broad market demand surging. On the pricing front, San Francisco’s industrial rents remain among the highest in the nation, with asking rents averaging about $28 per sq. ft. (triple-net) citywide. However, rent growth has stagnated – rents are essentially flat (down ~0.1% YoY) in 2025, after years of steep increases during the e-commerce boom. Landlords have become more flexible on terms to fill space, especially in older or less specialized product. New supply is still coming online primarily in the flex/life-science category: roughly 2.6 million sq. ft. of industrial (mostly lab) space is under construction in the metro, and speculative projects delivering this year are contributing to the higher vacancy. In contrast, warehouse construction is minimal, as developers have few available sites and are cautious given the demand slowdown.

Demand Drivers & Headwinds: The drivers for industrial demand are evolving. During 2020–2021, e-commerce expansion and logistics needs dominated, but that trend cooled as consumer behavior normalized and companies moderated their supply chain expansion plans. Now, some demand is coming from new-economy users: for instance, robotics and autonomous vehicle companies (like Zoox, which leased 190,000 sq. ft. in Foster City) have taken large spaces for testing and light manufacturing. This indicates San Francisco’s industrial market is partly fueled by tech/R&D, not just traditional distribution. The life sciences sector, a major flex space driver, saw a funding slowdown in 2023, which hurt demand, but core biotech firms still view the Bay Area as a premier location – if financing rebounds, so will lab leasing. A promising sign is that mid-sized tenants have returned to the flex market; the average lease size in 2024 grew to over 10,000 sq. ft., up from under 7,000 sq. ft. in 2023, suggesting more commitment from growing biotech and tech hardware startups. Key headwinds include the overhang of new supply in the flex segment – several large lab buildings completed since 2022 remain only partially leased, and more are finishing construction soon. This means the flex vacancy could rise further before it gets better. Another headwind is higher interest rates and economic uncertainty, which make industrial tenants cautious about expansion and make it harder for developers to finance projects. Additionally, industrial users have options to move to lower-cost areas in the region (e.g., East Bay or farther down the Peninsula) if San Francisco rents don’t adjust. Thus, competition within the broader Bay Area could limit how quickly SF’s industrial vacancies tighten.

Outlook and Resilience: The industrial sector’s outlook for the next year is one of gradual stabilization. Market players expect that the recent pickup in leasing, combined with a tapering off of new construction in late 2025, will help halt the rise in vacancy. Already, the fact that flex space absorption turned positive (after being deeply negative in 2022–23) shows the market’s ability to absorb new inventory given time. The San Francisco industrial market has underlying strengths: it serves specialized niches (like life science R&D and last-mile urban logistics) and benefits from limited land availability which historically kept vacancies low. Those fundamentals should reassert themselves once the current glut is sorted out. In the interim, we may see some adaptive reuse here as well – for example, if certain new lab projects struggle to lease up, owners might reposition them or slow-roll further phases. But by and large, the expectation is that demand will gradually catch up. As consumer spending stabilizes and biotech funding potentially improves, absorption in both logistics and flex spaces should turn positive. Rents are likely to remain flat in the near term (making SF more competitive regionally), then could resume modest growth once vacancies start trending down again. In short, the industrial sector is in a transition period – not immune to headwinds, but poised to benefit from the Bay Area’s innovative companies and the city’s strategic location as a distribution hub for dense, affluent consumers. Look for a more balanced market by 2026, with vacancy rates leveling off and the excess space gradually being absorbed as the economy grows.

New Leadership and Planning Policy Changes

Amid these market-specific dynamics, San Francisco’s broader real estate environment is also being reshaped by recent leadership changes and policy initiatives. In June 2025, Mayor Daniel Lurie appointed Sarah Dennis-Phillips as the new Director of the San Francisco Planning Department – a move that signals a strong push for reform and revitalization in the city’s development processes. Sarah Dennis-Phillips brings a unique blend of public- and private-sector experience: she previously worked within the Planning Department, served as a Senior Director at developer Tishman Speyer, and most recently led the Office of Economic and Workforce Development (OEWD) for two years. This background positions her to bridge the gap between City Hall bureaucracy and real-world development needs. Her appointment was part of Mayor Lurie’s strategy to coordinate economic recovery – effectively a talent shuffle that also saw Anne Taupier promoted to lead OEWD and Planning official Liz Watty tasked with running the Mayor’s new “PermitSF” initiative.

PermitSF and Permitting Reform: One of the first big mandates for Dennis-Phillips is to advance permitting reform, a critical issue for San Francisco’s real estate community. The newly launched PermitSF program is a City Hall initiative aimed at overhauling the notoriously slow and complex permitting process, with an initial focus on speeding up housing and small business permits. By placing a seasoned planner (Liz Watty) in charge of this initiative and having a Planning Director who understands the developer’s perspective, the Lurie administration is prioritizing cutting red tape. This reform is expected to streamline approvals for projects, reducing timelines that have historically stretched for years. Dennis-Phillips has a reputation for pragmatism and is seen as an ally of builders in this effort – her dual experience in government and development means she’s acutely aware of how permitting delays have hindered San Francisco’s growth. A more efficient permit system (e.g. modernizing applications, eliminating duplicative reviews) should facilitate the construction and adaptive reuse projects needed for the city’s recovery, from office-to-housing conversions to new affordable housing developments.

Housing Targets and “Family Zoning”: Another priority for the new Planning Director is helping San Francisco meet its aggressive housing production targets. Under California’s state mandate, San Francisco’s Housing Element plan calls for enabling roughly 82,000 new homes by 2031 to address the housing shortage. Achieving this will require major zoning changes and proactive planning policies. In fact, earlier in 2025 the city unveiled a proposed rezoning dubbed the “family zoning” plan – a sweeping effort to upzone neighborhoods and allow more multi-family housing construction citywide. This plan aims to legalize multi-unit homes in areas previously restricted to single-family usage, encourage additions of in-law units or duplexes in existing homes, and modestly increase height limits along transit corridors (generally up to 6–8 stories in certain zones). The term “family zoning” reflects the goal of creating more housing opportunities for families within San Francisco, rather than forcing them to move out for lack of space. The stakes are high: if San Francisco fails to implement these zoning changes by the state’s deadline (Jan 31, 2026), it could lose local control over approvals and forfeit significant state funding. With Dennis-Phillips at the helm, the Planning Department is expected to drive these rezoning efforts forward in coordination with elected officials. Her past role in OEWD also suggests she’ll keep an eye on tying housing growth to economic development – for instance, ensuring new housing is planned near job centers and transit. The new Planning Director’s support for the Housing Element objectives (such as simplifying the process to add units and pushing projects in high-resource neighborhoods) will be key to making San Francisco more affordable and hitting the production goals.

Economic Revitalization and Recovery Coordination: Beyond permits and housing, Sarah Dennis-Phillips’ appointment is a cornerstone of Mayor Lurie’s broader economic recovery strategy for San Francisco. City leaders recognize that reviving downtown and the overall economy requires a coordinated approach across agencies – planning, economic development, transportation, etc. Having Dennis-Phillips (with her economic development experience) lead Planning is meant to break down silos. This leadership change aligns with parallel efforts such as the formation of economic recovery task forces, investment in downtown safety, and incentives to fill vacant commercial spaces. For example, the city is pursuing policies to convert underused office buildings to residential or other uses, reduce commercial vacancies (through pop-ups or tax adjustments), and promote emerging industries like AI and life sciences. The Planning Department under Dennis-Phillips is expected to be more nimble and open to creative solutions – whether it’s fast-tracking conversion projects or adjusting zoning to encourage new types of businesses. There is also an emphasis on a “One Stop Shop” approach (embodied by PermitSF) to make it easier for entrepreneurs to open restaurants/retail or for property owners to renovate buildings. All of these efforts are being coordinated to restore confidence among investors and employers. The new Planning Director’s role in advancing San Francisco’s Housing Element and family-friendly zoning, while coordinating with OEWD on job growth initiatives, signifies an integrated push to bring residents, workers, and visitors back. In summary, this leadership and policy refresh at City Hall aims to tackle long-standing structural issues – housing scarcity, slow permitting, and an overcentralized downtown economy – to set the stage for a more resilient urban recovery.

Forward-Looking Commentary: What the Next 6–18 Months May Hold

San Francisco’s real estate recovery in the coming 6 to 18 months will likely be incremental and uneven, but the convergence of market trends and proactive leadership gives reason for measured optimism. Macro-economic factorswill play a significant role: if the Federal Reserve begins to ease interest rates in late 2025, lower financing costs could kick-start development projects (for example, some of those entitled housing units or even office-to-residential conversions might finally pencil out). A reduction in interest rates would also lower cap rates and potentially reinvigorate investment activity across asset classes, bringing more capital into San Francisco’s property markets.

The tech sector’s trajectory – especially AI – is a wildcard that leans positive for San Francisco. The city has quickly become a hub for AI companies, and their growth could be a boon to office absorption (as seen with recent AI-driven leases) and to housing demand as they hire workers. A mini tech boom centered on AI could help refill some of those empty office floors with new startups or labs and could support retail by increasing daytime foot traffic in certain areas. Moreover, population trends appear to be turning a corner. If San Francisco continues to see population inflows (even modest ones) due to revived urban appeal and job creation, that will uphold the strong fundamentals in multifamily and bolster consumer spending for retail. City initiatives to improve livability – safer streets, cleaner public spaces, more housing affordability – will be critical to sustaining this population recovery.

By sector, we expect in the Office market a slow grind upward from the bottom. Over the next year, vacancy might begin to edge down from its peak as more sublease space is withdrawn or leased and as downsizing tapers off. We do not anticipate a rapid drop in office vacancy – the overhang is too large – but even a plateauing and slight decline would mark a turning point. Rents are likely to flatten and could even start rising gently by late 2025 if demand steadily improves. One transformative factor could be the success of office-to-housing conversions: City Hall is actively exploring incentives (such as fee waivers and expedited approval for conversions) to reduce downtown office vacancy by repurposing obsolete buildings. Should even a handful of big conversions move forward, they would not only soak up vacant space but also bring new residents (i.e. life and spending power) into downtown, creating a virtuous cycle for retail and street vitality.

For Multifamily Residential, the outlook remains quite strong. We foresee continued low vacancies and rent growth in the mid-single digits annually, supported by limited new deliveries. In fact, the rental market could tighten further in the next 12 months, given the high cost of homeownership keeping more people in the renter pool and the slow pace of construction. Only if a wave of new units comes online (or a major economic downturn hits) would this trajectory change. The city’s push to produce more housing – if permitting reform succeeds – likely won’t materialize in completions until a couple of years out, so in the near term the supply side won’t catch up. Thus, tenants will face a competitive market, and landlords should enjoy high occupancy. However, the longer-term effect of rezoning and policy changes is very much aimed at moderating this market by adding units: if San Francisco can truly permit and start building tens of thousands of new homes through the Housing Element efforts, that will be a game changer by the late 2020s.

In Retail, we expect a gradual recovery scenario. The next 6–18 months should see vacancies in the retail sector slowly decline as entrepreneurial tenants backfill smaller spaces and as improvements in public safety and tourism draw shoppers back. Key indicators to watch will be tourist numbers (cruise ship arrivals, convention bookings) and office occupancy rates – if those rise, downtown retailers will get a boost. The “boom” times of Union Square may not return soon, but we anticipate stabilization: the bleeding has stopped, and now absorption can only improve from its deeply negative levels of recent years. By 2026, rent growth could turn consistently positive again (perhaps in the 1–3% range annually), especially for well-located retail strips. One emerging trend to watch is adaptive reuse of large retail spaces – for instance, portions of vacant department store buildings might be converted to offices, entertainment venues, or even gyms and educational facilities, diversifying the tenant mix downtown. City economic officials are likely to support such creative re-use to avoid dead space.

Finally, Industrial property in San Francisco should find its footing as well. We expect the flex submarket to remain under some pressure into 2025 as new lab space delivers, but by 2026 the pipeline will ease and excess vacancies can start to be absorbed as biotech and hardware firms expand. The life science industry tends to be cyclical; if funding rebounds with a more favorable economy, demand for those shiny new labs will pick up quickly. For logistics warehouses, the Bay Area’s consumption and trade will continue to grow, so we predict warehouse vacancies will inch down and perhaps return to the mid-single digits by late 2025. Rental rates for industrial uses might stay flat in the immediate term (helping fill space), then could rise again once the market equilibrium returns. It’s worth noting that any improvement in global supply chain stability and consumer spending (for example, if inflation cools and consumer confidence rises) would directly translate into more warehouse activity. Also, San Francisco’s push for economic diversification could attract more manufacturing or clean-tech companies to occupy industrial spaces, leveraging the region’s talent in robotics and green technology.

In conclusion, San Francisco’s real estate recovery as of mid-2025 is cautiously underway. Each sector has its narrative: Office is at a fragile inflection point, Multifamily is booming back, Retail is stabilizing after a dramatic reset, and Industrial is adjusting to post-pandemic realities. The city’s fortunes will hinge on the interplay of policy and market forces – and for the first time in years, those appear to be aligning in a positive direction. With a reform-minded Planning Director in place and major rezoning/housing initiatives on the table, San Francisco is tackling its challenges head-on. Combined with a resilient tech economy (now augmented by AI) and an improving quality of life, these efforts form a foundation for recovery. Change won’t happen overnight, and the next 6–18 months will require patience and continued policy support. But the overall outlook is that by late 2025 and into 2026, we will see a San Francisco real estate market that is more balanced, dynamic, and responsive – a city starting to reinvent itself for a post-pandemic era while preserving the innovative spark that has long driven its success.

June 25, 2025, by a collective of authors at MMCG Invest, LLC, California feasibility study consultants

Sources: MMCG Database, photos by Michal Mohelsky