SAN JOSE — Major rental deals powered the South Bay office market to its best year of leasing activity since the COVID-19 outbreak, a new report shows.
The report produced by commercial real estate firm Savills determined that while significant improvements have materialized for the sector, a full recovery for the region remains elusive.
“Full-year leasing volume for 2025 reached 7 million square feet, the highest level post-pandemic,” Savills stated in the report.
The overall leasing volume in 2025 was 26% higher than 2024, Savills reported.
The total availability rate for office space improved and shrank during the October-through-December fourth quarter of 2025, Savills reported. The availability rate is the combination of space offered directly by property owners and space offered by tenants through subleases.
“For the fourth consecutive quarter, office availability decreased,” Savills reported.
The vacancy level of overall available office space reached 24% in the fourth quarter of 2025, an improvement from 26% in the fourth quarter of 2024.
Despite some hopeful signs, the report warned that the South Bay office market remains in tough shape compared to its state before a global outbreak affected the job market and overall economy starting in March 2020.
“Full recovery remains distant despite a decline in availability,” the report stated.
It all boils down to economic realities that tenant requirements aren’t quite keeping up with what’s being offered.
“Despite healthy interest from AI and advanced tech firms, overall demand has not kept pace with the volume of space coming online, keeping availability well above pre-pandemic norms,” Savills stated in the report.
Property owners and brokers, however, are encouraged by a steady increase in asking rents in the South Bay, according to the report.
“The overall asking rental rate reached a new high,” Savills stated.
Per-month asking rents ended 2025 at $5.47 a square foot. That was up 2.8% compared with the July-through-September third quarter and 8.7% compared to the end of 2024.
Fourth-quarter average asking rents for Class A office space were $5.52 a square foot. That figure for top-notch and modern office space was up 7% from the year before and 0.5% from the third quarter, according to Savills.
Landlord efforts to dangle concessions in front of prospective tenants have helped to shove effective rents lower due to the aggressive stances of property owners that hunger for leasing deals.
“Effective rents continue to soften as landlords offer larger tenant-improvement allowances, longer free-rent periods, and more flexible deal terms to remain competitive,” Savills stated in the report.
Despite ongoing uncertainties and high vacancy levels, Savills is seeing signs that the market is turning the corner in a noticeable way.
“With tightening supply and steady demand, rent levels are expected to hold firm heading into 2026 as the market continues to stabilize,” Savills stated in the report.
A combination of established tech companies such as Apple, and up-and-coming firms such as Databricks, Crowdstrike, xAi, and CoreWeave have been leasing or subleasing big chunks of space in the South Bay, with several deals occurring in Sunnyvale.
Savills is especially encouraged by the prospect that sublease spaces are being filled, either by subtenants or the existing tenants.
“The region’s sublease availability fell in 2025 and is expected to continue in 2026 as companies reoccupy spaces and align real estate needs with long-term goals, signaling market balance,” Savills stated.
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