Office Is Recovering. Not Every Building Will.
Why Northern California's improving office market is putting asset-level strategy back in the driver's seat.
For several years, the office real estate conversation was dominated by one question: When will demand come back?
In Northern California, there is increasing evidence that it already is back. San Francisco recorded nearly 964,000 square feet of positive net absorption during the second quarter of 2026, according to CBRE, while overall vacancy finished the quarter at 29.2%. Then just out in the valley, Sacramento also recorded positive absorption with approximately 73,000 square feet absorbed and overall vacancy of 18.3%.
The direction is similar at the national level, as U.S. office net absorption reached 12.6 million square feet during the second quarter of 2026. This was nearly double the previous quarter, marking the ninth consecutive quarter of positive demand. Leasing activity increased 16% year-over-year, while overall vacancy declined by 30 basis points, which was the largest quarterly decrease seen since 2015.
However, improving market conditions do not mean that every office building will participate equally in the recovery. In fact, the next phase of the office cycle may make asset-level execution even more important than before.
Two Markets, One Important Direction
*Sacramento asking rent converted from CBRE's reported $2.15/SF/month FSG for comparability.
Source: CBRE Research, Q2 2026 San Francisco and Sacramento Office Figures. Markets are distinct CBRE-defined office markets; figures reflect each market's respective inventory. Sacramento asking rent converted from CBRE's reported $2.15/SF/month FSG to $25.80/SF/year for comparability.
San Francisco and Sacramento are fundamentally different office markets. San Francisco is a global technology and professional-services center, and has been experiencing an unusually strong demand catalyst from artificial intelligence in recent years. Sacramento, just 90 miles to the northeast, has a comparatively stable employment base shaped by government, healthcare, professional services and regional businesses.
Their absolute statistics therefore should not be treated as an apples-to-apples measure of investment attractiveness. What matters the most is the direction each market area is moving in.
Both markets generated positive absorption during Q2, even though significant vacancy remains. Furthermore, in San Francisco the change has become increasingly difficult to dismiss as a temporary bounce. Other brokerage research reinforces the trend: Kidder Mathews reported approximately 3.6 million square feet of leasing activity during Q2 and nearly 7 million square feet through the first half of 2026, 23% ahead of the comparable 2025 period.
The recovery also has a powerful technology component. CBRE reported that technology and AI companies leased more than 14 million square feet across San Francisco and Silicon Valley during 2025, accounting for 55% of leasing activity.
Capital certainly has noticed this. JLL reported earlier this year that institutional investors had grown to approximately 60-70% of San Francisco office investment activity, compared with a market previously dominated by private capital.
Consequently, the question is starting to change, and instead of simply asking whether office will recover, owners increasingly need to ask: "Will my building capture that recovery?"
A Recovering Market Can Still Leave Buildings Behind
Market-level recovery can obscure enormous differences between individual assets. Let's consider two buildings within the same submarket: Both benefit from improving tenant demand, each of these assets face the same general interest-rate environment, and they both compete within roughly the same labor market. Yet one may lease successfully while the other continues losing occupancy. Why?
The answer can include almost everything that happens between market conditions and property value: lease economics, tenant improvements, leasing commissions, building condition, amenities, operating expenses, capital planning, tenant relationships, financing and the owner's willingness to make decisions before problems become urgent.
That is where the impact of asset management can be observed most clearly.
In a severely distressed market, even excellent execution may be overwhelmed by weak demand. In an extremely strong market, rising rents and occupancy can sometimes conceal mediocre execution. A recovering but still highly-competitive market is different, and execution begins separating winners from losers.
The Flight to Quality Is Becoming a Flight to Relevance
The office recovery is about more than simply tenants taking more square footage. Which square footage they want is just as important.
CBRE's national Q2 research found prime office vacancy falling faster than overall vacancy, while the construction pipeline has declined 87% from its 2020 peak. That's an important combination taking place at the same time. Tenants increasingly have reasons to make longer-term workplace decisions again, but they remain selective.
In Sacramento, Kidder Mathews similarly describes a gradual and uneven recovery in which well-located properties with modern amenities are positioned to attract stronger demand while less competitive buildings continue facing leasing challenges. This doesn't necessarily mean that every owner should undertake a multimillion-dollar repositioning. Rather, its just that competitiveness sometimes comes from fundamentals:
- A clean and well-maintained property
- Responsive management
- Functional common areas
- Appropriate amenities
- Efficient building systems
- Flexible lease structures
- Competitive improvement packages
- Strong brokerage relationships
- An ownership team that understands what tenants actually value (perhaps the most important item in this list)
A building doesn't have to be the newest property in its submarket, but it will always need a good reason for tenants to choose the lease there.
Asset Management Sits Between the Market and the Outcome
Market conditions establish the playing field, but they do not determine the final score.
An asset manager cannot control interest rates, regional employment growth or the amount of competing inventory entering a submarket. What ownership can control is how intelligently the property responds, and that means translating market information into decisions.
- If tenant demand improves, should ownership push rents or prioritize occupancy?
- If a major lease expiration is approaching, how early should renewal discussions begin?
- If a vacant suite requires significant tenant improvements, does the expected rent and lease duration justify the capital?
- Should aging building systems be replaced today, deferred, or incorporated into a larger repositioning strategy?
- Would additional amenities actually improve leasing velocity, or would they simply consume capital?
- When does refinancing make sense? (especially with elevated rates since 2022)
- When has the business plan run its course and a sale becomes the best risk-adjusted decision?
These questions eventually flow through the property's financial performance.
Occupancy affects revenue.
Expenses affect NOI.
Capital requirements affect returns.
Risk affects valuation.
Asset management puts all of these pieces together.
Leasing Is a Capital Allocation Decision
One of the most important consequences of today's office environment is that signing a lease is not automatically the same thing as creating value. An owner might secure a tenant and improve occupancy while simultaneously committing substantial capital through tenant improvements, leasing commissions, free rent and other concessions.
Instead of simple asking "Can we lease this space," the appropriate question becomes:
"What economic return are we receiving for the capital required to lease it?"
Now, let's suppose that two prospective tenants want the same suite. One of them offers a higher face rent but demands extensive improvements, greater concessions and a shorter term. The other offers slightly less rent but requires less capital, signs for longer and provides stronger credit. The first lease may look better on a rent roll, but the second could create much more value.
That distinction is why lease analysis ultimately belongs within the property's broader business plan, instead of operating as an isolated leasing decision.
Retention May Be One of the Highest-Return Investments
The same logic as with the above example with prospective new tenants applies to existing tenants. Replacing a tenant can mean downtime, brokerage commissions, improvement costs, legal expenses and months (maybe even years) of uncertainty.
While that does not mean an owner should retain every tenant at any price, it does mean that understanding tenant satisfaction well before expiration can have significant financial value. Property managers, leasing brokers and asset managers consequently form an important information network.
When these relationships work properly, ownership should rarely be surprised by a tenant's decision.
Sacramento Shows Why Submarket Knowledge Still Matters
The Sacramento market provides another useful lesson. Even while regional conditions improve, performance can vary dramatically within the same metropolitan area. Recent reporting noted overall improvement while certain Highway 50-Corridor office submarkets continued to experience vacancy above 30%.
That's an important reminder for investors accustomed to discussing markets in broad categories: there is no single "Sacramento office market," just as there is no single San Francisco office experience.
A suburban office building in Rancho Cordova has different demand drivers, competitive properties and tenant requirements than an office tower near the State Capitol. The same reasoning applies across San Francisco, the Peninsula and the East Bay.
For example, while San Francisco has generated substantial positive absorption, Kidder Mathews reported negative 322,645 square feet of Q2 absorption in the East Bay. This just goes to once again show how stubbornly localized real estate recoveries can be (and this reinforces the point made in previous articles on this blog that real estate recoveries are rarely even across a market area).
The Business Plan Should Be a Living Document
To put it simply: a property business plan is necessary, while at the same time, treating it as immutable is dangerous.
The assumptions made at acquisition can change rapidly.
- Interest rates move
- Tenants can expand or contract quickly
- Construction pricing changes all the time
- New competitors enter the market
- Major employers can move in (or out) nearby
- Refinancing opportunities appear.
- Planned capital projects can become unnecessary as fast as they can become urgent.
Effective asset management therefore operates as a continuous cycle:
Business Plan → Execute → Measure → Adjust → Repeat
The objective never changes: maximize risk-adjusted value while protecting the investment. Its the path toward that objective which can change.
That's particularly important during transitional markets because historical assumptions may become obsolete faster than expected.
What Owners Should Be Watching Now
For Northern California office owners, several questions will deserve continued attention throughout the remainder of 2026:
- "Is leasing velocity improving within the property's specific competitive set, and not merely the broader market?"
- "Are asking rents translating into actual economics after concessions?"
- "How much capital will upcoming lease expirations require?"
- "Which tenants represent the greatest rollover risk?"
- "Are operating expenses moving faster than revenue?"
- "Which improvements actually influence tenant decisions?"
- "How does the property compare with the buildings that are winning today's leases?"
- "If the market continues improving, is the property positioned to benefit?" (perhaps the most important question in this list)
These are the questions that turn market research into asset strategy.
Recovery Changes the Job
For much of the post-pandemic office downturn, owners were forced into defense mode. They needed to prioritize for liquidity preservation, vacancy management and addressing their debt maturities, while simultaneously focusing on tenant retention and expense control, and also waiting for greater visibility. While these priorities have not disappeared, improving demand has introduced a different challenge: deciding when and where to switch to offense mode again.
The national office recovery is broadening, while on the regional level, San Francisco is generating meaningful positive absorption and Sacramento is showing improvement of its own. Institutional capital is returning to submarkets that it avoided just a few years ago, and an extraordinarily limited construction pipeline could eventually make existing competitive buildings increasingly valuable.
None of that guarantees success for an individual property by itself. It does, however, create an opportunity for success, and that distinction may define the next stage of the office cycle. To reiterate the title of this article: Office is recovering. Not every building will.
The buildings that outperform will increasingly be those where ownership understands the market, knows the property, maintains strong relationships with the people closest to it, allocates capital intelligently and continuously adjusts the business plan as conditions change. In other words, as the market recovers, asset-level strategy is back in the driver's seat.
Sources:
- CBRE - San Francisco Office Figures Q2 2026
- CBRE - Sacramento Office Figures Q2 2026
- CBRE - Q2 2026 U.S. Office Market Report
- CBRE - AI Boom Drives Bay Area Office Leasing
- Kidder Mathews - San Francisco Office Q2 2026
- Kidder Mathews - Sacramento Office Q2 2026
- JLL - San Francisco Office Investment Turnaround
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AdVantage Research | Bay Area Market Commentary
www.traviszeiler.com/consulting/real-estate
Disclaimer
This article is intended as market commentary based on publicly available industry research and news sources. It reflects the author's analysis and should not be interpreted as investment, legal, or construction management advice.
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CHARTS/TABLES/IMAGES in this article:
Charts are illustrative and based on publicly available market data, industry reports, and observed trends in Bay Area and Sacramento Region office. These visual aids reflect observed market trends. Data compiled from multiple institutional sources; values normalized for comparability. The underlying data used has been deemed reliable but is not guaranteed to be accurate or complete, due to the availability of data and the methods by which it was collected and reported.
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