Artificial intelligence has been a boon to San Francisco real estate. But not enough to offset the broader struggle in the market.
The vacancy rate for San Francisco office space hit a new record of 34.5% in the second quarter, according to a report released Monday by commercial real estate firm Cushman & Wakefield. That’s up from 33.9% in the first quarter, 28.1% in the same period last year and 5% before the pandemic.
Meanwhile, the average asking rent fell to $68.27 per square foot in the quarter, the lowest since late 2015, down from $72.90 a year ago and a peak of $84.70 in 2020.
San Francisco is grappling with the dual challenges of getting people back to the office after the Covid pandemic and a tech market slowdown that has led to mass job cuts across the industry. Tech companies have laid off more than 530,000 employees since the start of 2022, according to Layoffs.fyi, with the biggest reductions in staffing in the alphabet, Meta, Amazon, Tesla, Microsoft And Sales force.
Among the factors that have softened the blow recently are the huge popularity of generative AI and the decision of fast-growing startups to open large offices in San Francisco.
OpenAI, a market leader with a private valuation of more than $80 billion, announced in October that it had leased about 500,000 square feet of space in the Mission Bay neighborhood, the city’s largest office lease since 2018. Robert Sammons, senior research director at Cushman & Wakefield, said OpenAI continues to look for more space in the city.
Also last year, OpenAI competitor Anthropic leased 230,000 square feet of space at Slack’s headquarters. And in May of this year, Scale AI signed a lease for 170,000 to 180,000 square feet at Slack’s headquarters. Airbnb Administartive building.
“San Francisco is certainly the epicenter of AI, but AI is not going to save San Francisco’s commercial real estate market,” Sammons said. “It will help.”
While big-cap AI companies are signing large leases for new space, the larger trend is that tech companies, law firms and consulting firms are looking to reduce their footprint as existing leases come online, reflecting the broader move toward hybrid work, Sammons said.
In many cases, companies are looking to move to higher-quality spaces in more desirable parts of the city, because prices have dropped and employers need to be close to restaurants and shops to encourage employees to return, Sammons added.
“High quality award spaces continue to perform well, because tenants want to be in the best locations with the best amenities around them,” Sammons added.
Some of the city's best employers, including Salesforce, Uber, visa And Wells FargoCompanies have brought employees back to the office for part of the week. That’s helped in the Financial District, where vacancy rates remained at 34.2% on the North Side and 32.7% on the South Side at the end of the quarter. In Southern California, historically a popular area for venture capital-backed startups, vacancy rates are nearing 50%.
Southern California is further from mass transit options and has also been hurt by a large number of retail stores leaving. Total vacant office space across San Francisco during the quarter was 29.6 million square feet, Cushman & Wakefield said.
There are positive signs in the market, the company said in its report, with absorption expected to improve in the second half and office job numbers stabilizing after a sharp decline. But Sammons said there appears to be more room for rents to fall and vacancies to increase. He said uncertainty surrounding the upcoming presidential election could be a factor in delaying new leases.
“Sometimes tenants postpone making decisions when there are major elections,” he said.
WATCH: San Francisco's Commercial Vacancies Hit All-Time High
