A lease from an artificial intelligence startup may be the latest sign of recovery from the pandemic for one of the country's hardest-hit office markets.

San Francisco-based Sierra has signed a deal that notably ups the size of its headquarters in the city, with plans to relocate from a 4,000-square-foot office to a 41,104-square-foot space about a mile away at 235 Second St. The nearly 267,000-square-foot office is also home to iPhone maker Apple.

The deal in San Francisco's South of Market neighborhood comes as the area's office vacancy rate is declining, albeit slowly, for the first time since 2020. South of Market's office vacancy rate of 28.8% remains among the highest in San Francisco, and higher than the greater market average of 22.4%, but that figure is "slightly lower than where it was six months ago," when it was above 29%, according to a CoStar market analysis.

San Francisco's total office vacancy rate, meanwhile, hasn't posted a decline since 2019. Still, the city's leasing activity is up by about 1 million square feet compared to last year, driven by the region's reputation as a leading national hub for AI companies.

Sierra is one such firm betting on that reputation, and it joins other AI firms marking expansions in the city's South of Market area. Scale AI is behind the city's largest office lease of 2024, signing an about 178,000-square-foot deal in May at 650 Townsend in Showplace Square, a neighborhood within South of Market.

So far this year, office tenants have signed leases totaling 750,000 square feet in South of Market, up from 370,000 square feet last year, according to CoStar data.

Sierra, co-founded in 2023 by former Salesforce chief executive Bret Taylor and former Google executive Clay Bavor, raised $85 million earlier this year to support the development of a customer support AI tool for businesses.

The firm is likely to relocate from its current digs at 215 Second St. by next month, according to reports. It will occupy the fifth floor of the six-story building, according to people with knowledge of the lease. Apple is the largest tenant at the building owned by landlord Birmingham Development, occupying roughly 88,000 square feet in a deal that expires next year, according to CoStar data.

Sierra’s lease highlights growing office requirements among AI companies still in their “nascent stage,” Alexander Quinn, JLL’s senior director of research in Northern California, told Costar News in an email.

“We expect AI tenants to increase their footprint over the next six years, exceeding 12 million square feet by 2030,” he said.

That would further help the rebound for South of Market, where offices were just 2.9% vacant in 2019. Other recent leases in the area include an about 148,000-square-foot deal from fintech company Ayden at 505 Brannan St. in April, and the city of San Francisco's move that same month to relocate its headquarters in a 157,000-square-foot deal.

San Francisco's reputation as an AI hub is in large part due to talent pool access; the city is home to six major AI research institutions, while no other city counts more than three, according to a JLL report. AI companies accounted for 25% of San Francisco office leases last year, and there are about 100 companies with up to 50 employees currently scouting office space in the city, according to JLL.

In some of the city’s largest recent deals, ChatGPT maker OpenAI chose to sublease over 400,000 square feet of Uber’s former headquarters in Mission Rock last November; and Anthropic, a safety-focused AI firm, is taking over Slack's former headquarters at 500 Howard St. in a deal totaling 230,325 square feet.