Bay Area Commercial Real Estate Finds Footing as Lending Tightens and Workspace Demands Shift

Written by:

Steve Marcinuk

Date:

19 Jan 2026

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The Bay Area’s commercial real estate market is contending with stricter lending standards and new expectations for workspace use. However, transactions are still moving forward for borrowers who understand the current requirements.

Jenna Williams, Vice President and Relationship Manager at BMO, works with middle-market clients generating $10 million to $100 million in revenue across the East Bay corridor between San Francisco and San Jose. Her vantage point offers a clear view of how both lenders and borrowers are managing a financing environment that has changed significantly since the pandemic.

Market Recovery Becomes Visible

Despite persistent headlines about office vacancies and downtown slowdowns, the Bay Area is showing concrete signs of recovery from pandemic-era disruptions. Williams points to the visible return of activity in San Francisco. “Two years ago, you could be in San Francisco, and it was a ghost town. Now you’re in there, and you’re seeing businesses operating, people coming back,” she says. “While we are not at pre-pandemic levels, we are certainly recovering in this area.”

This recovery is most evident in the types of real estate deals taking place. The focus has shifted from large-scale new construction to the conversion and repurposing of existing office buildings. Williams notes, “What used to be the Class A office space owner-user, a lot of folks are getting into that and remodeling them more into workplace space where multiple people can rent office space.”

The change is driven by lasting shifts in how companies use office space. Many businesses that once leased entire floors now require far less square footage. Williams explains, “There might be an empty 10,000 square foot space that used to be a Class A office that somebody would have occupied. Now maybe that office is only needing 2,000 square feet, and so they’re leasing the other out and building out shared conference rooms, shared break room.” The result is a new model: flexible layouts, shared amenities, and multiple tenants in what were once single-occupancy offices.

Deal Flow and Investment Patterns

Current deal sizes in Williams’ market typically range from $5 million to $20 million for property acquisitions, with an additional $2 million to $3 million for renovations and conversions. Large-scale new construction requiring complicated entitlements and complete build-outs has become rare. Instead, the emphasis is on adapting existing structures to match today’s demand for flexible, smaller-scale office and mixed-use spaces.

The investment landscape has also changed. Rather than individual buyers dominating transactions, Williams sees more partnerships forming to acquire and manage properties. “You might see two people who own businesses forming an LLC or corporation to acquire said real estate, and then leasing it out,” she says. This approach allows investors to share risk and pool resources, which is essential given the current financing constraints.

Lending Standards Grow Stricter

Banks have tightened lending criteria in response to broader regulatory and market pressures. Williams details how banks must maintain specific loan-to-deposit ratios, meaning they hold sufficient cash reserves to support their loan portfolios. “It’s not that the banks don’t have money to lend, but we are required to live in a place where we have to have so much cash available to be able to lend,” she explains.

This regulatory pressure has shifted banks toward “cash flow lending.” Instead of underwriting loans based on projected future returns, lenders now focus on borrowers with proven, stable operating income. “Operating businesses tend to do better than investors in these types of markets, because they have the operating capital,” Williams says.

The most common hurdle for borrowers is meeting the debt service coverage ratio (DSCR) requirements. Williams explains, “Every dollar I lend you, you have to make a minimum of like $1.25 or $1.30 based on a bank’s debt service coverage.” Many applicants fall short of this ratio, especially those with high existing debt or limited current income. As a result, fewer speculative deals are being financed, and banks prioritize clients with strong cash-flow track records.

Bridge Loans Fill the Gap

For projects that do not initially meet traditional bank lending standards, a two-stage financing approach has become common. Developers and investors often secure short-term, high-interest bridge loans from private lenders to fund acquisitions or renovations. Once the property is completed, stabilized, and generating income, a traditional bank loan can refinance the bridge loan.

“A lot of those guys are living in the bridge loan world where they get a quick, expensive 12 to 18 month loan that they have an exit strategy for,” Williams says. Private lenders require a well-defined repayment plan and rarely hold loans for long periods.

Coordinating the transition from private to bank financing requires careful planning. Williams frequently works with both borrowers and private lenders at the outset to clarify what benchmarks must be met for the eventual bank loan. “If you know the targets you’re supposed to hit, you know it’s better,” she says, emphasizing that clarity on requirements can make or break a project’s success.

Market Outlook: Caution and Preparation

Looking ahead, Williams advises a conservative approach for the next two years. After previously counseling clients to “survive till ’25,” she now sees 2026 as the year to reposition. Her guidance is direct: reduce debt and build cash reserves. “The more you can pay off debt and save up cash, that’s it. Figure out where you can cut some spending that doesn’t totally affect you, and try to pay down as much debt,” she says.

This strategy is not only about surviving current challenges but about being ready to capitalize on opportunities when the market rebounds. “The more conservative you can get, the better position you will be to take advantage of when the market swings the other way, because it will swing – the pendulum always does,” Williams notes.

Adapting to New Market Realities

The current market is a clear departure from the era of low interest rates and abundant liquidity that defined much of the previous decade. Williams observes, “When you go through something like the pandemic, where there was a ton of cash in the marketplace and really cheap rates – well, it’s kind of not there now, yet people are still expecting that economy.”

Success now requires a different mindset. Borrowers must be prepared to contribute more equity, accept stricter loan terms, and demonstrate consistent cash flow. Williams advises, “You have to think it through differently. You might need to come in with more money, or you might need to ask for specific terms. But there are still deals being done.”

For real estate professionals in the Bay Area and similar markets, Williams’ experience underscores that opportunities remain for those who can meet today’s higher standards. The key is a clear-eyed assessment of leverage, risk, and income – not assumptions based on past cycles.

As Williams puts it, market participants are “stumbling around in the dark together” as they adjust to ongoing economic uncertainties. But for those who can adapt, transactions are still happening – just based on new rules and tighter criteria.

The Bay Area’s commercial real estate market is not returning to its old patterns, but it is not at a standstill either. Recovery is visible in increased activity, new approaches to office space, and a shift toward more cautious, partnership-driven investment. Lenders and borrowers who recognize the realities of today’s environment – and plan accordingly – are finding ways to move forward, even as the market’s next phase takes shape.