The Bay Area’s Current Chapter for Flexible Workspace

If you've been watching the headlines on San Francisco office space, you've seen two contradictory stories. One says the office market is dead. The other says it's the best quarter since 2019. Both are technically true. They're just talking about different buildings.

At Pacific Workplaces, we've been operating flexible workspace across the West Coast for 23 years. We've watched the Bay Area office market cycle through multiple booms, busts, and re-stabilizations. So when the data starts moving, we pay attention. Let's get into what's actually happening, what the AI boom means for flexible workspace, and where operators and investors should be looking.

The Bay Area office market has found a pulse

After several years of describing the Bay Area office market as anything from "distressed" to "in freefall," the data is finally turning. According to Colliers' Q1 2026 report, the Bay Area saw 8.1 million square feet of leasing activity — on pace for the strongest quarterly total of the current cycle. San Francisco alone hit 3.4 million square feet of leasing in Q1, the sixth straight quarter above 2 million, with net absorption of 855,000 SF — the strongest since 2019.

Class A asking rents in the Bay Area averaged $67.68 PSF in Q1, up year over year for the first time in years. Overall vacancy fell 90 basis points YoY to 20.6%.

Translation: the recovery is uneven, but it's real.

AI is doing most of the heavy lifting

This isn't a broad recovery. It's an AI recovery — and a few specific submarkets carrying the rest of the city on their back.

Per VTS, San Francisco's office demand index jumped 70% quarter over quarter in Q1 2026 — the largest increase in the country. VTS is now projecting 12.8 million square feet of total SF office leasing for 2026, a 15% YoY jump. CBRE found that the Bay Area captured 14 of the 100 largest office leases in the U.S. in 2025, totaling 4.3 million SF.

The marquee deals tell the story:

• Anthropic leased 420,000 SF at 300 Howard in January, on top of 250,000 SF at 500 Howard and 100,000 SF at 505 Howard from 2025.
• OpenAI added 222,000 SF at 1800 Owens, bringing its total SF footprint to roughly 1 million SF across Mission Bay.
• Databricks expanded to 455,000 SF in Sunnyvale's Cityline development.
• Harvey AI took a 93,000 SF pre-built suite from Kilroy Realty.

AI firms now occupy at least 6 million square feet across Silicon Valley alone. According to CBRE, no other portion of the country has seen AI funding come close to the Bay Area's roughly $100 billion since 2020.

But this is a two-speed market

Here's the part most headlines miss. The overall San Francisco vacancy rate is still around 28%. But trophy and prime-built space sits at around 15% vacancy. That's a fundamentally different market.

As CBRE's Colin Yasukochi noted, the sublease inventory that defined the last three years — former Zendesk, former Meta, the carcasses of the 2021 expansion era — has already been picked through. The next wave of leasing will happen directly with landlords, not sublessors.

The market is bifurcating into two:

• Trophy and highly-upgraded buildings — tight, getting tighter, with rent stabilization at the top end and selective new construction back on the table.
• Everything else — Class B and C commodity space where vacancy, discounting, and conversion conversations dominate.

What AI tenants actually want

BXP's President Doug Linde put it bluntly on a recent earnings call: "AI demand is not a tower business." These companies are younger, growing faster than any tech cohort in recent memory, and their space needs are different.

They want:

• Immediate occupancy — Harvey AI took a Kilroy pre-built suite because it could move in immediately.
• Shorter terms — companies that 5x in headcount in 12 months can't sign 10-year leases on conviction.
• Furnished, plug-and-play — CapEx for a custom build-out is not where a Series B company wants to deploy capital.
• Mid-rise and creative space — SoMa, Mission Bay, Dogpatch, Showplace Square. Not the Salesforce Tower.

If that list looks familiar, it should.

That's a flex space product specification. The largest, best-funded technology companies in the world are leasing direct, but the next 1,000 AI-adjacent companies behind them — the data labelers, the model evals shops, the AI-powered SaaS plays, the robotics startups, the AI services consultancies — are exactly the kind of tenant flex was built for.

The robotics wave is coming behind the software wave

JLL is projecting another 1.5M SF of robotics and AI-centric drone company leasing in 2026 in the Bay Area. Per JLL's Alexander Quinn, this demand is concentrated in southeast San Francisco — Dogpatch, Mission Bay, Potrero, Showplace Square — where AI talent and robotics engineering converge. Most of these are smaller flex industrial spaces. Reflex Robotics took ~17K SF in SoMa. Chef Robotics took ~20K SF in Showplace Square.

This is the part of the AI boom that flex space is most directly positioned to serve. The 420,000 SF Anthropic lease is a generational deal for one building. The 17,000 SF Reflex Robotics deal is the template for the next 200 leases.

Takeaways for operators

If you're operating flexible workspace in the Bay Area today, the playbook is shifting:

• Position for AI-adjacent tenants, not the AI giants themselves. The largest AI companies are taking direct leases. Your tenants are the smaller players in their orbit.
• Submarket selection matters more than ever. SoMa, Mission Bay, Potrero, and adjacent southeast SF submarkets are where the demand is concentrated. CBD towers are not where AI is leasing.
• Pre-built, move-in-ready suites are the product. Speed-to-occupancy is the single most important variable for an AI tenant.
• Don't ignore the suburbs. Per the Instant Group, cities under 100,000 in population are averaging over 100% demand growth YoY. The Bay Area suburban submarkets — Walnut Creek, San Mateo, Pleasanton, Sacramento — are real opportunities.

Takeaways for investors

For investors looking at the flexible workspace category right now, this is one of the more interesting setups in commercial real estate in years:

• AI is creating a wave of demand the office sector hasn't seen since 2014. That wave is breaking unevenly, and flex space is well-positioned to capture the secondary wash.
• Operator selection matters more than market selection. Bay Area is the right market. The question is which operators have the discipline to stay asset-light, the regional density to win local enterprise mandates, and the operational track record to survive the next downturn.
• Watch the bifurcation. If you're investing in flex space in trophy submarkets, you're competing with landlords' in-house programs (BXP, Kilroy, Tishman). If you're investing in flex space in secondary or suburban submarkets, you're competing with vacant office. Different game, different risk profile.

San Francisco didn't "solve" its office market in 2025 or early 2026. But the city did demonstrate that AI-driven growth can translate into real occupancy, not just headlines.

For flexible workspace operators with a credible track record and the right submarket exposure, this is the most interesting moment in the category in a decade.

Want a deeper dive? Register for our webinar on May 27, 2026. Our CEO, Laurent Dhollande, will discuss how AI is contributing to the growing coworking market, and how interested investors can lock-in on these favorable economic conditions.

Pacific Workplaces operates 16 locations across the West Coast and is expanding to eight more. Subscribe to the PAC blog for the next two posts in this series: 1) How AI agents are reshaping demand for flex space, and 2) The three different capital structures investors should understand before allocating to this category.

Data Sources: Colliers Q1 2026 Bay Area Office Market Report; CBRE 2025 Office Lease Report; VTS Office Demand Index Q1 2026; Savills Q1 2026; JLL San Francisco Office Insight; Kidder Mathews Q1 2026 SF Office Report; Commercial Observer; The Real Deal; Bisnow; IPG.