Introduction: A Market in Flux

As we move through 2025, California’s commercial real estate market finds itself at a critical crossroads. National headlines may point to a rebound — with office leasing activity reaching its highest level in over five years — but the reality on the ground in many of California’s key metros paints a more complex picture.

Across the state, the office market continues to wrestle with the lingering impacts of the pandemic, remote work normalization, and shifting economic conditions. Vacancy rates are climbing in several regions, large tenants are downsizing or walking away entirely, and developers are pulling back amid uncertainty. At the same time, there are early signs of recovery in certain submarkets, where leasing has picked up and employers are cautiously reentering the market.

This divergence between national momentum and local headwinds defines the current CRE landscape in California. From Los Angeles to San Jose, from San Diego to Orange County, each market is telling its own story — one marked by transformation, turbulence, and opportunity for those positioned to adapt.

Office Market Trends: California vs. the Nation

At a national level, the U.S. office sector started 2025 with a surge in momentum. An estimated 115 million square feet of office space was leased in the first quarter alone — a 13% jump from the previous quarter and the strongest performance since mid-2019. While the average lease size remains smaller, hovering around 3,500 square feet, the sheer volume of transactions indicates growing confidence among tenants and a shift toward redefining space needs in a post-pandemic world.

But California tells a different story.

Despite national gains, several of the state’s largest office markets continue to lag. Cities like Los Angeles and San Jose have shown some early signs of recovery, but markets such as San Diego, Orange County, and San Francisco are still struggling under the weight of high vacancies, stalled leasing, and ongoing tenant downsizing.

A consistent theme across California is the decline in large leases and a growing preference for high-quality, amenity-rich buildings. Sublease availability is up in nearly every region, and tenant behavior reflects a strategic “flight to quality” — companies are choosing newer, more flexible buildings over older, underutilized assets. While select markets are beginning to stabilize, the broader state-wide office market remains uneven, mirroring the fragmented nature of the economic recovery itself.

Regional Spotlights

Los Angeles: Mixed Signals in a Fragmented Market

Los Angeles kicked off 2025 with some encouraging activity — but also stark reminders of the challenges ahead. In the first quarter, the city recorded 5.3 million square feet of office leasing, marking its strongest quarter since the second half of 2023. Even more promising, net absorption turned positive for the first time in nearly three years, signaling that more tenants moved in than moved out.

But while certain pockets of the market — such as Century City and El Segundo — have seen renewed interest, Downtown LA continues to struggle. Vacancy in the city center has soared to 21%, significantly higher than the citywide average of 16%. Flagship properties are feeling the impact. One California Plaza, once valued at nearly half a billion dollars, has seen its appraisal plummet by 74% amid rising vacancies and cash flow shortfalls. The property now backs a troubled CMBS loan and is just 63% occupied, following the departure of key tenants like Skadden.

It’s far from an isolated case. Other DTLA icons — including EY Plaza, 777 Tower, and the Gas Company Tower — have experienced similar valuation drops of 65–70% from their pre-pandemic peaks. The flight of major occupiers like Forever 21 only adds to the pressure, as newer Westside properties outcompete older towers on amenities, energy efficiency, and proximity to creative and tech hubs.

Looking ahead, the outlook remains cautious. Analysts expect vacancy to rise past 16.5% citywide by 2026, and rent growth is forecast to underperform inflation through at least 2030. For landlords and investors, the market remains bifurcated — showing signs of life in select areas while others continue to face a long and uncertain road to recovery.

San Diego: Vacancy Mounts Amid Weak Demand

San Diego’s office market has entered 2025 under growing pressure. After several sluggish quarters, vacancy has reached 13%, the highest level in over a decade, and is expected to exceed 14% by the end of the year. Leasing volumes remain well below the levels seen between 2015 and 2019, and many tenants are showing caution as economic uncertainty and cost concerns linger.

Two of downtown San Diego’s most high-profile developments illustrate the current disconnect between supply and demand. IQHQ’s Research and Development District, a 1.7 million-square-foot waterfront life science campus, remains without a single announced tenant months after completion. Similarly, the nearly 700,000-square-foot Campus at Horton continues to face uncertainty after a notice of default on $350 million in debt triggered a foreclosure process.

The situation is even more stark in the city’s once-booming life sciences sector. Vacancy has climbed to 18%, and the availability rate now exceeds 30%, nearly double what it was just a few years ago. Leasing activity remains soft, with 2024 and 2025 volumes roughly half of what was seen during the 2021 peak. Sublease space continues to flood the market, with 1.8 million square feet now available, up from just 200,000 three years ago.

A major contributor to the slowdown has been reduced venture capital funding, which has dampened demand from emerging biotech firms. Meanwhile, San Diego’s aggressive life sciences construction boom continues — with approximately 4.4 million square feet of new space still in the pipeline, two-thirds of which is currently unleased.

Even with long-term fundamentals like UC San Diego and ongoing government support for biotech, the near-term outlook is defined by oversupply and sluggish demand. Many brokers anticipate it could take years to absorb the current and incoming inventory, especially if leasing velocity doesn't materially pick up.

Orange County: Positive Momentum Paused

Orange County entered 2025 with strong leasing momentum from the previous year — but that growth has stalled. In the first quarter, the market posted a net occupancy loss of over 150,000 square feet, reversing five consecutive quarters of positive absorption. As a result, office vacancy has climbed to 12.4%, with availability increasing to 15.5% — the first uptick in over a year.

Several high-profile move-outs contributed to the shift. Pacific Premier Bank vacated nearly 45,000 square feet at the Newport Gateway tower in Irvine. The Regents of the University of California left a 44,000-square-foot building in UCI Research Park, while St. Joseph Health System exited an 85,000-square-foot property in Anaheim that has since been listed for both lease and sale.

These departures are not isolated incidents, but part of a broader trend of companies reassessing their real estate footprints. As tenant needs evolve, some office buildings — particularly those with outdated layouts or poor locations — are being repurposed entirely. One notable example: Mercury Insurance sold its Brea Plaza Office Park to a multifamily developer, joining a growing list of properties being redeveloped into industrial or mixed-use projects.

Despite the recent setback, Orange County’s fundamentals remain relatively stable compared to other California metros. However, the recent reversal serves as a reminder that even stronger markets are vulnerable to shifting occupancy patterns and evolving workplace strategies. Adaptive reuse and strategic repositioning will likely play a growing role in shaping the county's office landscape moving forward.

San Jose & Silicon Valley: Leading the Recovery

While much of California’s office market continues to struggle, San Jose and the greater Silicon Valley region are showing signs of a meaningful turnaround. Availability has fallen from 19.1% at the end of 2023 to 17.4% in Q1 2025, marking one of the most significant improvements among major U.S. office markets.

Much of this momentum has been driven by a flight to quality, with tenants gravitating toward high-end, four- and five-star buildings. A standout example is Amazon’s 217,000-square-foot deal at 401 San Antonio Road in Mountain View, where the e-commerce giant took over space previously held by WeWork in a licensing agreement. It’s one of the region’s largest transactions in the past year and a signal that major tech occupiers are beginning to engage in the market again — albeit with more flexibility.

Another encouraging sign is the pullback in sublease activity. Firms like Proofpoint have withdrawn office listings they had previously put up for sublease, indicating increased confidence in their space needs and a stabilization in workplace strategy across the region.

That said, caution remains warranted. Layoffs in the tech sector, which hit a multi-year high in early 2025, continue to ripple through the market. Companies like Salesforce have announced AI-driven hiring freezes, stating that new engineering roles will not be added this year due to the performance of their automated systems.

In addition, immigration policy remains a looming wildcard, particularly in Silicon Valley, where a large portion of the workforce comes from abroad. Restrictions could hamper the labor pipeline and, in turn, cap future growth.

Still, compared to other California metros, San Jose appears to be further along in its recovery, buoyed by increased leasing activity and renewed investor interest in the region’s tech and AI sectors.

San Francisco: Early Gains Clouded by Tech Layoffs

San Francisco’s office market is beginning to show signs of life, but the recovery remains precarious. Net absorption has improved as fewer tenants are downsizing, and some are starting to renew or right-size rather than vacate. This stabilization is a welcomed shift after several years of contraction.

However, any optimism is tempered by significant employment headwinds, particularly in the tech sector — the backbone of the city’s office demand. In early 2025, layoffs spiked across major tech employers, including Cruise, which eliminated 650 positions, and Salesforce, which not only announced additional cuts but also confirmed it would halt new engineering hires due to successful AI integration. Zendesk, Asana, and other tech firms followed suit with workforce reductions of their own.

This wave of layoffs isn't just cyclical — it reflects a broader transformation in how companies operate. AI automation is replacing some roles entirely, particularly in software engineering and support functions. The long-term impact of this shift could mean structurally lower demand for traditional office space, especially among pre-revenue and early-stage companies.

Despite these employment challenges, leasing activity has picked up modestly. Yet, San Francisco still holds the highest office availability rate in the country at 26.3%, far above the national average. While the pace of space being returned to the market is slowing, and new leasing is helping stabilize the bleeding, the path to recovery remains fragile.

San Francisco’s rebound — if it holds — will depend heavily on tech sector stabilization, immigration policy, and whether AI leads to new types of job creation that offset ongoing cuts.

Employment & Economic Backdrop

Behind California’s uneven office market recovery lies a similarly mixed employment picture — particularly in the sectors most responsible for driving office demand. While some cities are seeing gains in healthcare and government jobs, office-using industries like tech, finance, and business services are under pressure, dragging on leasing activity and long-term occupancy trends.

San Diego: Job Losses Despite Labor Force Growth

In San Diego, the office market’s struggles are mirrored by the employment data. Over the past 12 months, office-using sectors shed approximately 9,000 jobs, contributing to rising vacancy rates in professional and business services hubs across the region. Despite those losses, San Diego’s civilian labor force has grown by 1.3%, adding roughly 20,000 people year over year — a sign that more residents are actively seeking work, even as job creation slows.

That imbalance has nudged the unemployment rate up to 4.5%, a 20-basis-point increase from the previous year, though still below California’s statewide average. Notably, January 2025 saw the loss of more than 25,000 nonfarm jobs, with retail and hospitality among the hardest hit, adding additional pressure to commercial corridors and the city’s broader economic recovery.

San Francisco: Tech Layoffs and AI Reshape Hiring

In San Francisco, the labor market is facing a more structural challenge. While net absorption in the office market has improved, employment growth remains anemic — just 0.1% over the past year. At the same time, layoffs accelerated in February 2025, marking the highest monthly total since April 2023.

Much of the turbulence is concentrated in the tech sector. Companies like Cruise, Zendesk, Asana, and Salesforce have all made significant cuts, citing cost-saving measures and strategic shifts. More concerning, though, is the growing impact of AI-driven automation. Salesforce, for example, attributed its hiring freeze to the success of its internal AI systems — a move that could foreshadow long-term reductions in new job creation across the industry.

While the Bay Area continues to attract substantial venture capital — particularly in AI — the region's employment gains are lagging. Until job growth resumes in a meaningful way, especially in office-reliant sectors, any recovery in the commercial real estate market is likely to remain on fragile footing.

Investment & Development Trends

The commercial real estate investment landscape in California is shifting rapidly. As leasing momentum slows in many markets and occupancy levels remain stubbornly low, investors and developers are pulling back, reassessing risk, and rethinking how properties will perform in a post-pandemic environment.

Investor Pullback: Valuations Plunge, Confidence Wavers

Downtown Los Angeles offers a sobering snapshot of current investor sentiment. Several landmark towers have seen staggering valuation drops, with EY Plaza, the 777 Tower, and the Gas Company Tower all selling for 60–70% less than their previous peak values. The most dramatic of these — One California Plaza — dropped in value from $459 million in 2013 to just $121 million in 2025, amid rising vacancy and cash flow shortfalls. The building now backs a troubled $300 million CMBS loan in special servicing.

This trend reflects a broader cooling of investor appetite across the state. High interest rates, shifting tenant preferences, and elevated vacancy rates have prompted buyers to sit on the sidelines and owners to challenge new appraisals. In turn, developers are showing restraint, delaying or canceling projects that may have looked promising in the low-rate, pre-pandemic era.

Speculative Construction: Risk Rising

San Diego exemplifies the risks of overbuilding in a softening demand environment. The city’s life sciences sector has nearly 4.4 million square feet of lab space under construction, two-thirds of which remains unleased. With an availability rate over 30% and leasing volumes well below historical averages, brokers are increasingly concerned that it could take years to absorb the pipeline — especially as venture capital funding for new biotech companies declines.

At the same time, projects like the Campus at Horton are facing foreclosure risk, with a $350 million default notice filed earlier this year. The case illustrates how speculative development — even in high-profile locations — can become vulnerable when anchor tenants fail to materialize and debt becomes unmanageable.

A Shift Toward Industrial and Mixed-Use Redevelopment

Faced with changing demand and challenging economics, many owners are now pivoting. In Orange County and Los Angeles, we’re seeing a growing trend of underutilized office buildings being sold for conversion to industrial or mixed-use projects. This adaptive reuse strategy reflects a practical reality: older office properties that no longer meet modern standards may have more value as warehouses, residential, or hybrid retail concepts.

As California’s office market evolves, developers and investors are adjusting their playbooks, focusing on flexibility, fundamentals, and long-term repositioning — rather than speculative bets on a fast return to pre-2020 conditions.

What to Watch: 2025 and Beyond

As California’s commercial real estate markets continue to evolve, the trends that shape the rest of 2025 — and the years that follow — will be defined by how quickly stakeholders can adapt to new realities. From tenant behavior to capital markets, the landscape ahead will look very different from the past decade.

Flight to Quality Isn’t Slowing Down

Tenants are increasingly selective, prioritizing modern, amenitized, energy-efficient buildings that can support hybrid work models and attract employees back to the office. Older, less flexible buildings — particularly in areas like Downtown LA and parts of San Diego — are being left behind unless repositioned. Well-located Class A properties with top-tier amenities continue to outperform, even in weaker leasing environments.

Sublease Saturation Needs a Reset

Across major metros, sublease space is flooding the market, with millions of square feet still sitting unclaimed. San Diego's life sciences market, in particular, highlights how quickly the balance can shift — from tight availability to oversupply. Until sublease inventories are absorbed or withdrawn, rents and occupancy will remain under pressure, especially in second-generation space.

Employment Recovery Will Be Critical

Markets like San Francisco and San Jose are closely tied to the performance of the tech sector, where job growth has slowed or reversed due to AI-driven automation and widespread layoffs. In the absence of strong employment gains — especially in office-using industries — it will be difficult for vacancy rates to fall meaningfully. Employment trends will be the single most important factor to watch for any sustained recovery in leasing demand.

Tenants Favor Smaller, Flexible Deals

Gone are the days of long-term, oversized lease commitments. Companies are opting for smaller footprints, shorter lease terms, and more flexibility. Nationally, the average deal size has dropped to around 3,500 square feet, and California markets are following suit. Expect landlords to continue adapting by offering plug-and-play spaces, flexible layouts, and aggressive concessions to compete.

Distressed Assets Create Long-Term Opportunity

While near-term pain is unavoidable in some markets, the valuation reset unfolding across California is creating opportunities for long-term investors. Assets trading at 50–70% below peak values may appeal to buyers with a multi-year horizon and a strategy to reposition or repurpose. The next wave of winners in commercial real estate may not be the ones who built new — but those who acquired wisely during the downturn.

Conclusion: A Market in Transition

California’s office market is anything but uniform. It’s a complex patchwork of resilience and volatility, shaped by unique dynamics in each region. While some markets like San Jose and select submarkets in Los Angeles are showing early signs of stabilization, others — including San Diego, Orange County, and San Francisco — continue to face headwinds from oversupply, tech layoffs, and shifting tenant behavior.

Nationally, the outlook for commercial real estate is growing more optimistic, with leasing volumes rising and demand showing early signs of normalization. But California’s recovery will depend on local fundamentals — job creation, tenant preferences, and the ability of landlords and developers to adapt to an evolving landscape.

For owners, investors, and occupiers alike, the road ahead demands agility, realism, and strategic positioning. Success in 2025 won’t come from waiting for the market to return to what it once was — it will come from engaging with what it is now and where it’s heading next.