🚨California’s office sector is undergoing a structural upheaval. San Francisco’s Q3 2025 vacancy rate sits at 34.6% – the highest in any U.S. market – while Los Angeles follows with 24.1%. Combined with plummeting values (often down 50%+ from peak) and record levels of distress, office landlords and lenders are pivoting from lease-up to salvage. Conversion proposals are proliferating, but execution is narrow and costly. Investors face an extreme bifurcation: trophy Class A assets see stabilized rents, while Class B/C assets are marked closer to land value. Capital is circling, but underwriting is brutal.
San Francisco Office Vacancy: 34.6%, Q3 2025 — [Source: CBRE].
LA Office Vacancy: 24.1%, Q2 2025 — [Source: CBRE].
SF Office-to-Housing Potential: 61,000 units possible — [Source: Kaplan Group via Axios].
U.S. Office Value Decline from 2022 Peak: ~36% avg (50%+ in SF/LA) — [Source: CBRE].
Loan Performance. SF now leads the U.S. in critically at-risk office loans, with over 60% of local bank exposure flagged. Many buildings no longer cash flow, with negative DSCR and near-impossible refinance scenarios. Loans are being extended with restructuring or equity infusion contingencies.
Demand Dynamics. Rightsizing dominates. Tenants are downsizing and consolidating; newer Class A buildings with high amenity stacks lease ~5–10K SF spaces to AI and biotech firms. Commodity stock remains dark even at steep rent cuts.
Asset Strategies. Class B/C buildings now underwrite multiple scenarios: low-occupancy hold, co-working activation, or full/partial residential conversion. Conversion feasibility hinges on plate depth, plumbing core proximity, and zoning.
Capital Markets. Office deal volume is frozen except where forced sales or conversions are feasible. Distressed assets in SF are drawing bids at 20–30 cents on the dollar. Buyers include family offices and value-add private equity; institutional capital is largely sidelined.
Office values face structural repricing.
Winners: Class A, amenitized buildings with post-COVID specs.
Reuse and conversion playbooks dominate underwriting.
Sales occur at deep discounts or land value.
🛠 Operator’s Lens
Refi. Most buildings cannot refi without paydowns; extensions require fresh capital or credible reuse plans.
Value-Add. $50–$100 psf repositioning budgets are baseline; 6–12 months free rent typical.
Development. Adaptive reuse takes 12–24 months minimum; feasibility tied to building depth, code, light.
Lender POV. Lenders triage by asset class and location. Class A get mod extensions; B/C face foreclosure unless buyers emerge.
Policy Inflection: SF and LA exploring streamlined conversion permits, zoning relief, and tax incentives.
Stock Reduction: Expect 2026–27 to see major removals from office inventory – either via conversion or demo.
Capitulation Trigger: 2025–26 will see more CMBS/loan maturity defaults, setting comp floors.
Recovery Conditions: Return-to-office trend and macro growth will determine if 15%+ structural vacancy persists.
Axios – SF Office Conversions Study (June 27, 2025). https://www.axios.com/local/san-francisco/2025/06/27/office-to-housing-conversion-potential-sf CBRE – LA Office Figures Q2 2025. https://www.cbre.com CBRE – SF Office Market Q3 2025 (Estimates). Kaplan Group via Axios – Conversion Potential Study (2025).
