Tuesday, March 25, 2025

Understanding Office Leasing Trends

Downtown San Francisco, particularly the Financial District and Jackson Square, is currently experiencing a 33.9% office vacancy rate as Q1 2025 draws to a close, according to CoStar. While this statistic is often highlighted in various reports, it’s important to recognize that relying solely on this broad figure doesn’t fully capture the complexities of the office leasing market in downtown San Francisco.

Market segmentation is crucial for understanding where growth is occurring. By focusing on thriving sectors, we can better articulate the reality: downtown San Francisco is already in a phase of growth and recovery.

One key trend to watch is the leasing activity in Trophy buildings, which are seeing positive momentum with a vacancy rate of just 15.3% (CoStar). While still above pre-pandemic levels, this is a notable contrast to the broader market.

But what exactly defines Trophy buildings? Why are they experiencing lower vacancy rates? And how does Michael Shvo's $1 billion investment in downtown San Francisco contribute to the broader trend of increased leasing activity in these high-end properties?

Office Building Classifications

Building classifications have long been a cornerstone of the commercial real estate industry, though there is no official governing body that dictates these distinctions. In practice, sources like CoStar provide the widely accepted categorizations used to define properties.

Here's a general breakdown of each:

Beyond these basic categories, a colloquial distinction is made for Trophy Buildings, a subset of Class A properties that offer the highest level of luxury and amenities. These buildings, like the Transamerica Pyramid, Salesforce Tower, and 555 California Street, represent the epitome of workplace luxury, blending iconic architecture with exceptional features and exclusive, high-end work environments.

Trophy Buildings by the Numbers

The trend towards luxury office spaces is evident in the increasing demand for Trophy buildings. Rather than mandating employees' return to the office, companies are opting for premium workspaces that offer a prestigious environment. This shift is clearly reflected in the leasing numbers.

The following table provides an overview of the leasing landscape as of Q1 2025 to date:

Trophy buildings are attracting tenants, in part, due to significantly lower rents compared to pre-pandemic levels. While large corporations continue to lease these spaces, smaller businesses are also taking advantage of the reduced rents. In Q4 2019, Trophy rents over $100 per sqft, but today they are priced between $60 to $80 per sqft on average. This shift has made premium office space accessible to both large firms and smaller companies seeking a prestigious downtown address. As more businesses can afford this luxury, these spaces are filling up faster.

However, the allure of Trophy buildings goes beyond simply reduced rent. The amenities and offerings in these properties are key drivers of their success, as demonstrated by the Transamerica Pyramid.

Case Study: The Transamerica Pyramid

The Transamerica Pyramid, which underwent a $1 billion renovation completed in September 2024, serves as a prime example of the emerging trend in San Francisco’s office market. Led by Michael Shvo (SHVO), who acquired the building in 2020, the renovation was seen as a strategic investment in the future of downtown San Francisco, particularly amid the uncertainty surrounding office real estate during the pandemic. Since its completion, the investment has already yielded significant returns, with leasing activity increasing by 80% and vacancy rates dropping from 50% in Q2 2024 to 33.8% in Q1 2025 (SF Chronicle, CoStar).

The revamped space now boasts a coffee bar in the lobby, a reimagined redwood park with sculptures and lounges, a wellness center, a sky lounge, a tenant-only sky bar, and ground-floor restaurants, collectively transforming the Pyramid and surrounding properties into the vibrant “Transamerica Center.”

Moreover, the increase in leasing activity at the Transamerica Pyramid not only underscores the flight to luxury but also highlights the property’s immediate monetary returns. While many office buildings— including other Trophy properties— are offering lower rents, the Transamerica Pyramid commands premium rates, ranging from $155 per sqft on the lower floors to $300 per sqft at the top, making it the third-priciest office building in the United States, according to the SF Chronicle.

In mid-March 2025, global law firm Morgan Lewis announced it had signed a 123,000 sqft lease, occupying seven floors of the Pyramid. The firm had previously been paying $58.50 per sqft at One Market Plaza, demonstrating that despite the significantly higher rents at the Transamerica Pyramid, the premium amenities and luxurious environment made it a compelling investment. 

This move highlights how leasing at Trophy-status properties isn't solely driven by lower rents, but by their inherent appeal, regardless of current market conditions. Elevating a building’s amenities is not merely a reactive strategy to increase occupancy, but a long-term investment designed to generate revenue that surpasses pre-pandemic levels—and do so quickly.

Conclusion

The Transamerica Pyramid’s renovation and leasing surge is a bright spot in downtown San Francisco’s real estate market. Even without such substantial investments, Trophy buildings consistently outperform other office classes. While Transamerica is leading the charge, Trophy buildings overall are recovering faster, whether through high-end renovations or the enduring appeal of luxury office spaces.

As downtown SF recovers, one thing is clear: companies want to create environments that attract employees back to the office, rather than mandate their return. Whether through renovations or strategic leasing, investment in premium office spaces is reshaping the future of downtown SF’s office leasing, signaling how the market is being reimagined rather than simply recovering from the pandemic.

Understanding these trends is crucial, as market segments like Trophy buildings are telling a very different story than broader vacancy rate discussions. These buildings are not only driving recovery but also elevating downtown San Francisco in the process. Keep an eye on this trend—it's a key green shoot in downtown SF's recovery.

Written by Hannah Kiburz, Economic Development Analyst

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References:

• "Office Building Classification Guide." BOMA Canada, Apr. 2023.
• "Foster + Partners: Transamerica Pyramid Center." Parametric Architecture, 3 Nov. 2020.
• Waxmann, Laura. "S.F. Law Firm Leaving Longtime Office for Space in Transamerica Pyramid." San Francisco Chronicle, Hearst Communications, 13 Mar. 2025.