The city that perfected the art of the doom loop is now quietly engineering a boom loop, one square foot at a time.
San Francisco has spent the better part of five years being the cautionary tale at every commercial real estate conference — the city where office vacancy soared past 34%, where “For Lease” signs outnumbered coffee shops, and where consultants earned handsome fees advising clients to look literally anywhere else. Then the artificial intelligence revolution arrived, set up shop in Mission Bay and South of Market, and proceeded to make everyone look a little silly. The City, it turns out, was not just unprepared for the AI boom. It was spectacularly, almost poetically unprepared — and that, for contrarian investors paying close attention, made it one of the most interesting real estate stories in America.
From Doom Loop to Boom Loop: The Numbers That Changed Everything
The turnaround has been swift enough to cause whiplash. In 2025, San Francisco’s office market recorded 10.2 million square feet in leases — the highest volume since 2019 — with AI companies now occupying roughly 7 million square feet, approximately 12% of total occupied office space. The vacancy rate, which peaked at a jaw-dropping 34.4%, has since fallen to approximately 28% as of Q2 2026 — a 320-basis-point improvement from its Q2 2025 peak, per Colliers. The first quarter of 2026 set yet another record: tenants leased roughly 3 million square feet, AI companies accounting for nearly 40% of deal volume, with more than 370 prospective tenants entering the San Francisco market between January and March — the most VTS had tallied in over a decade. By mid-2026, leasing volume for the first half of the year reached approximately 6.4 million square feet, and at that pace, full-year activity is projected to approach 15.3 million square feet — a figure that would rival San Francisco’s 1996 peak, per Newmark. Venture capital funding in San Francisco reached $252 billion in just the first five months of 2026, more than double the $117 billion raised during all of 2025. The AI ecosystem is also minting wealth. OpenAI and Anthropic, both headquartered in San Francisco, have filed to go public at valuations approaching $1 trillion each, promising to mint a new class of multimillionaires in a city already holding the highest concentration of billionaires per capita in the world. The residential market responded accordingly: more than 140 homes sold for at least $1 million above asking price in just the first half of 2026, compared to just six in the same period of 2024, according to a Compass analysis. Compass Chief Economist Mike Simonsen called the dynamic “absolutely BANANAS“.
Hudson Pacific Properties (HPP): Patience Rewarded With a Record-Setter
For investors wondering how to play this commercial real estate recovery, Hudson Pacific Properties, Inc. (NYSE: HPP) recently delivered a compelling data point. In June 2026, Hudson Pacific executed a 502,082-square-foot, 23-year lease with the City and County of San Francisco at 1455 Market Street — the largest office lease signed in San Francisco since 2018. The deal brings occupancy at the approximately 1-million-square-foot, 22-story LEED Gold-certified tower to 89%, with the City’s total footprint in the building exceeding 900,000 square feet through 2049, plus two five-year extension options. Several city departments — including the Municipal Transportation Authority, the Human Services Agency, and the City Administrator — will consolidate into the tower, moving out of what officials described as “aging, costly and seismically vulnerable” facilities. The building itself is a study in long-term conviction. Hudson Pacific originally acquired 1455 Market for $93 million in 2010, watched its valuation collapse to roughly $96.6 million by 2024 — an 80% haircut from its 2015 peak of $219.2 million — and then held on as San Francisco’s office market rewrote its own obituary. The lease reset rents at approximately $40 per square foot, replacing a previously negotiated higher-escalation schedule, and includes a city purchase option that effectively creates a multi-decade public-private partnership with significant optionality baked in. For HPP shareholders, this is exactly the kind of government-backed, long-duration anchor that REIT investors prize — and it signals that the company’s San Francisco thesis is playing out, if on a timeline that tested all but the most patient holders.
The InterGroup Corporation (INTG): A Boutique Play on San Francisco’s Hospitality Revival
If Hudson Pacific represents the institutional grade of the commercial comeback, The InterGroup Corporation (NASDAQ: INTG), through its majority-owned subsidiary Portsmouth Square, Inc., tells a quieter but compelling story about what happens when San Francisco’s hospitality market rediscovers its footing. InterGroup owns the 544-room Hilton San Francisco Financial District — a property that spent several years nursing significant debt obligations and going-concern uncertainty before the city’s AI-powered revival changed the math. The fiscal third quarter ended March 31, 2026 delivered a decisive inflection: total revenues reached $20.4 million, a 21% year-over-year increase, while hotel revenues surged 35% to $16.5 million. The Hilton San Francisco Financial District posted an ADR of $306, occupancy of 94%, and RevPAR of $287, compared to $241, 89%, and $215 respectively in the prior-year quarter. Income from operations rose 81% to $4.3 million, and net income attributable to InterGroup came in at $0.46 million, or $0.21 per diluted share — a decisive swing from a loss of $0.27 per share in the same period a year earlier. The Super Bowl hosted in San Francisco during the quarter provided a demand catalyst alongside the broader structural tailwind of AI-sector hiring and return-to-office mandates. Full-year fiscal 2025 EBITDA surged 131.7% year-over-year to $13.2 million. InterGroup further bolstered liquidity through the December 2025 sale of a non-core 12-unit Los Angeles multifamily property for approximately $4.85 million, generating a $3.5 million GAAP gain and $2.58 million in net cash proceeds. The hotel segment is increasingly carrying the narrative — and that narrative is getting better every quarter.
The Infrastructure Paradox: Unprepared in More Ways Than One
There is a wrinkle in San Francisco’s triumphant return that investors should monitor. Trophy-class office vacancy had fallen to approximately 5% by mid-2026, with rents for premium spaces reaching $140 per square foot — a 40% increase year-over-year, per JLL. Available sublease space has dropped from nearly 10 million square feet in mid-2023 to approximately 3.4 million square feet today, as venture-backed firms increasingly prioritize move-in-ready space. The same AI boom filling offices is straining the power grid running the data centers behind those offices. Some data center projects have already been shelved due to community resistance and grid capacity constraints. Infrastructure — not capital — is becoming the new bottleneck, and as Colliers noted, investment is becoming “increasingly bifurcated — AI-driven sectors expanding while traditional industries lose momentum”. New development is cautiously emerging: Related California’s 41-story office tower near Jackson Square is one tenant agreement away from breaking ground, and CBRE’s Colin Yasukochi projected major South of Market construction starting by 2027 — a speculative groundbreaking in a market still carrying a 28% vacancy rate that perfectly encapsulates what makes San Francisco’s story unlike anywhere else in the country.
What Investors Should Be Watching
The convergence of three storylines — San Francisco’s AI-fueled office demand, Hudson Pacific’s landmark lease, and InterGroup’s hospitality revival — paints a picture of a market recovering unevenly but recovering unmistakably. CBRE projects AI companies could occupy 21 million square feet in San Francisco by 2030, potentially cutting the city’s vacancy rate in half, while 50,000 to 60,000 new jobs could be added to the local economy over the same period. San Francisco was indeed “totally unprepared” for what is happening. The infrastructure gaps are real, the recovery remains K-shaped, and the city’s storied ability to complicate its own success should never be underestimated. But for investors who can read between the vacancy statistics and see the structural forces underneath, the city that spent five years as everyone’s favorite cautionary tale may be quietly becoming one of the most interesting commercial real estate turnaround opportunities in a generation.
The doom loop had a sequel. They’re calling it the boom loop — and the cast includes some very large leases, one patient REIT, and a Financial District hotel that just posted a 94% occupancy rate.
The Sources
Here are all the sources used in the story, in numerical order:
- JLL — “Betting Big on San Francisco’s Office Market Turnaround”
- The Guardian — “‘Absolutely Bananas’: San Francisco Homes Sell for $1M Above Asking Price Amid AI Boom”
- Yahoo Finance — “InterGroup Third Quarter 2025 Earnings”
- Business Wire — “Hudson Pacific Executes 502,000-Square-Foot, 23-Year Lease with City and County of San Francisco”
- CBRE — “AI Boom Drives Office Leasing Surge in San Francisco Bay Area”
- Forbes Finance Council — “Will AI Lead to a Rebound for Commercial Real Estate?”
- The Real Deal SF — “SF’s Office Market Hits Mark Not Seen Since 2011”
- PwC — “San Francisco AI Growth and Real Estate Market Trends”
- SF Chronicle — “Tech Boom Fuels S.F.’s Best Year for Office Leasing Since 2019”
- The Registry SF — “Silicon Valley Commercial Real Estate Market Expected to Thrive in 2026 and Beyond”
- Nasdaq — “Hudson Pacific Executes 502,000-Square-Foot, 23-Year Lease with City and County of San Francisco at 1455 Market”
- The Real Deal SF — “Hudson Pacific Lands SF’s Biggest Office Lease in Nearly a Decade”
- MarketScreener — “The InterGroup Corporation Reports Fiscal Year 2025 Results”
- The Dissent SF — “Bay Area Office Vacancies Fall in Q2 as AI, Tech Firms Take Up Millions of Square Feet”
- The Real Deal SF — “San Francisco Eclipses New York in Office Recovery”
- The Real Deal SF — “SF Office Vacancy Rate Shrinks as Demand from AI Firms Picks Up”
- Daily REIT Beat / X — “Hudson Pacific Properties Lands Massive Lease at 1455 Market”
- StockTitan — “InterGroup Posts Profit, Sells LA Multifamily Asset”
- Allwork.Space — “AI Tenants Power San Francisco Office Market Recovery After Years of Slump”
- The Real Deal SF — “SF Office Boom Spreads South as Silicon Valley Vacancy Falls”
- Yahoo Finance — “InterGroup Swings to Earnings in Q3 on Improved Hotel Revenues”
- Investing.com — “InterGroup Reports 21% Revenue Rise in Fiscal Q3”
- The Real Deal SF — “SF Office Leasing Activity Rides AI Wave to Near 30-Year High”
- The Real Deal SF — “SF AI Office Boom Meets Immigration Labor Warning”
- LinkedIn / Vistaaraihub — “AI Drives Office Demand in SF, But Infrastructure Becomes Bottleneck”
Informational purposes only. Not investment advice. Tickers referenced: HPP (NYSE), INTG (NASDAQ).
The Sources
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