While leasing by artificial intelligence startups is helping to prop up San Francisco’s office market, larger technology firms are weighing their real estate holdings in and outside the city as they focus on other investments.

In a move that highlights that shift, Google has signed a downsized renewal deal in the city, with plans to shrink its 150,000-square-foot outpost at 215 Fremont St. to a 64,000-square-foot space in the building, people familiar with the deal confirmed to CoStar News.

The renewal follows a similar retrenchment in the city from the search engine giant as it redirects funds from its office footprint to initiatives such as artificial intelligence. The Mountain View-based company said in May it will exit One Market Plaza's Spear Tower later this year after opting to not renew its 263,000-square-foot lease in the building.

The company has also paused plans to build upwards of 15,000 housing units and millions of square feet of commercial space in downtown San Jose.

Google did not respond to a request to comment from CoStar News on the downsized deal in the city's South of Market neighborhood. It first signed a lease at the building in 2019, when San Francisco's office vacancy rate was 6%, according to CoStar data. Five years later, the city has yet to recover from the COVID-19 pandemic with one of the highest office vacancy rates in the country at 22.4%, also an all-time high for the region.

Google has previously told CoStar News that the firm remains "committed to our long-term presence in San Francisco" as it focuses on increasing efficiency in its office portfolio "to meet the current and future needs of our hybrid workforce."

Since 2022, tech firms have eliminated more than 400,000 jobs as the industry shifts investment priorities. Those cuts, coupled with largely hybrid workforces, have contributed to an office pullback in the wake of the COVID-19 pandemic.

"The fact is that we've seen a lot of sublease space come from tech companies that have reduced their office footprints, mostly in relation to hybrid and remote work, but partially related to layoffs as well," Colin Yasukochi, executive director of CBRE's Tech Insights Center in San Francisco, told CoStar News.

Google, for example, said it will maintain its "much slower pace of hiring" and will "continue to optimize (its) real estate portfolio" as it redirects the savings to high-growth initiatives, executives told analysts on an earnings call earlier this year. The search engine giant paid $1.2 billion in the fourth quarter of 2023 alone on expenses related to shrinking its global office footprint.

San Francisco is among the hardest hit cities from tech downsizing efforts, specifically the city's downtown neighborhoods, like South of Market where offices are 28.8% vacant, according to CoStar data, but that figure is "slightly lower than where it was six months ago," when it was above 29%, according to a CoStar market analysis.

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.

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.

Scale AI is behind the city's largest office lease of 2024, signing a 178,234-square-foot deal in May at 650 Townsend in Showplace Square, a neighborhood within South of Market.

San Francisco-based Sierra signed a deal this week 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.

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 company'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.

Elsewhere in San Francisco, 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.

Despite the pickup in leasing activity from startups, San Francisco still has a long road to recovery that will be further challenged as leases signed before the pandemic expire during a time when companies are still reevaluating their real estate needs, according to Nigel Hughes, senior director of market analytics at CoStar Group.

“As these leases roll over, many tenants are choosing to downsize,” Hughes said. “So, while new leasing activity in San Francisco has increased over the past year, other spaces continue to become available. This may mean that the availability rate will continue to increase in the months ahead.”

Such was the case for Google's renewal at 215 Fremont, a 373,863-square-foot building once home to the global headquarters for Charles Schwab. The financial firm occupied almost the entirety of the building before it subleased the space to Fitbit in 2016, a wearable technology company that Google acquired in 2021.

Clarion Partners acquired the building for $335.5 million, when Google subleased nearly half of Fitbit's space. The other half of that space, totaling about 161,000 square feet, is listed as available for lease, according to CoStar data.