By Billy the Broker (I just want to stay anonymous)
Last week, a young friend called me, frantic. His landlord in Palo Alto had just informed him that his lease would not be renewed. The landlord had found someone willing to pay more. Much more. When I asked how much, he told me. I laughed. He didn’t.
“What am I supposed to do?” he asked. “Where am I supposed to go?”
“Sacramento,” I replied. “Or maybe Modesto.”
He hung up on me.
The irony, of course, is that his predicament and San Francisco’s supposedly moribund office market are two sides of the same coin. The tech sector—the very sector that led the pandemic exodus—is making a comeback.
For San Francisco’s commercial landlords, this is wonderful news. For the guy trying to find an apartment in Palo Alto? Not so much.
San Francisco’s office availability rate hit 33.6 percent in Q3 2025, down 90 basis points from the previous quarter, according to a report from Savills. That’s still more than double pre-pandemic levels, still historically catastrophic, but it’s moving in the right direction. Leasing volume reached 2.2 million square feet, up from 1.7 million square feet a year earlier and exceeding the five-year quarterly average.
Here’s the plot twist nobody saw coming: While overall asking rents declined 1.9 percent year-over-year to $66.92 per square foot, sublease asking rental rates climbed to $58.44 per square foot in Q3, up from $56.71 last quarter.
What’s driving this? AI startups. According to Savills, these companies continue to attract significant venture capital funding and drive stronger sublease demand across the region. Available sublease space has contracted sharply to 5.7 million square feet, down 2.4 million square feet from the same quarter last year.
Look at Q3’s major deals: Anthropic (104,345 SF), Harvey AI (92,814 SF), Resolve.ai (37,155 SF), plus fintech firms like Brex, Kikoff, and Highnote Platform—all securing new locations in a supposedly dying market. These aren’t legacy tech companies making conservative bets. These are well-funded startups hungry for space and apparently willing to pay premium prices to establish themselves in San Francisco.
Now here’s where the story gets interesting—and by interesting, I mean depressing if you’re trying to find a place to live. That AI-driven office recovery? It’s bringing workers back to the region. And those workers need somewhere to live.
According to RentCafe’s latest data, Silicon Valley now has 14 prospective renters battling for every available apartment. The region’s competitive score stands at 80.3, the highest in California. Occupancy rates hover at 95.6 percent, and lease renewal rates are at 57.1 percent, the highest in the state.
Translation: If you’re a commercial landlord watching AI startups lease your office space, congratulations. If you’re a residential landlord in Silicon Valley, also congratulations. If you’re trying to find an apartment? You’re screwed.
The logical response to Silicon Valley’s rental insanity should be fleeing to cheaper markets. And that’s exactly what’s happening. Sacramento and the Central Valley are absorbing the overflow, soaking up displaced renters like a sponge. But here’s the kicker: competition is following them there.
Sacramento and the Central Valley were supposed to be the safety valves, the escape hatches for those priced out of the coast. Instead, they’re becoming pressure cookers themselves, with competitive scores approaching 70 and occupancy rates that would have seemed extraordinary just years ago.
There’s really only one law of economics worth knowing, and it’s as immutable as gravity: supply and demand. When AI companies flush with venture capital start leasing office space in San Francisco, they need employees. Those employees need housing. But nobody’s building enough housing.
Silicon Valley is adding new residential units at just 0.88 percent of total inventory. San Francisco and the North Bay languish at 0.43 percent. Even Sacramento, with its relatively robust pace, is only adding 1.08 percent—the highest construction rate among Northern California’s major metros, which tells you everything you need to know about how pathetic the rest of the region is performing.
These aren’t construction rates. They’re rounding errors.
Meanwhile, on the office side, Class A buildings in prime locations are recovering nicely. Leasing volume is up. AI startups are paying premium rates. Most transactions are occurring in trophy properties, with asking rental rates averaging $73.61 per square foot. Technology firms are once again the key players in the market.
So we have a commercial real estate sector showing signs of recovery, particularly in the highest-quality buildings. We have well-funded tech companies willing to pay for space. We have workers returning to offices. And we have virtually no residential construction to house those workers.
You don’t need an MBA to figure out what happens next.
Here’s what nobody talks about at those real estate conferences: Every positive indicator in the commercial market is potentially a negative indicator for residential renters. Every AI startup that leases office space brings workers who need apartments. Every venture capital round that gets announced means more hiring, more demand for housing, more competition for the limited units available.
The high lease renewal rates across the region tell the real story. Existing tenants are choosing to stay put rather than face the brutal competition, further constraining inventory for newcomers. Can you blame them?
San Francisco’s commercial comeback is real, at least for premium properties in good locations. AI startups are driving genuine demand. Office availability is declining. That’s legitimately good news.
But commercial recovery without residential construction is like filling a bathtub without a drain plug—something’s got to give. In this case, what’s giving is affordability, availability, and any hope that average workers can afford to live near their jobs.
Articles published in our Contributor section do not necessarily represent the views of The Registry or Mighty Dot Media, Inc. They represent a selection of topics chosen for the value of their editorial perspective. We welcome feedback and alternative positions on topics, and we will consider publishing those, as well.
