A fast-growing pool of artificial intelligence companies are expanding their real estate footprints in San Francisco, reigniting the city's dormant office market and chipping away at its record-high availability rate.
At least half a dozen of these AI firms recently signed leases to accommodate expansions in the city in moves that both underscore their commitment to in-person work and hint that San Francisco's economic rebound is starting.
The city, which before the pandemic had been the priciest office market in the nation, has struggled in recent years due to the fallout from remote work, layoffs and other corporate cost cuts, an unprecedented amount of sublease availability and an office vacancy rate that in some downtown neighborhoods surpasses 30%.
"The biggest connection to positive demand is AI companies and some other smaller to medium-sized tech companies looking to grow their footprints," Colin Yasukochi, CBRE's Tech Insights Center executive director, told CoStar News. "We'll see the progression of those companies that are now in 20,000-square-foot to 35,000-square-foot spaces that, in a year or two from now, could be taking up more than 100,000 square feet. That takes time to manifest itself, but there are early signs of positivity to show a sustained recovery."
Hive AI, a software company that uses artificial intelligence to moderate digital content, recently subleased more than 57,100 square feet of office space at 100 First St. The space had been on the sublease market for roughly two years since cybersecurity firm Okta, which leases 14 of the downtown San Francisco property's 27 floors, initially chose to dump it in 2021, according to CoStar data.
The deal means that Hive AI, which recently raised $85 million and is in the process of closing another $200 million round, will relocate from its existing headquarters at 575 Market St., where it has outgrown its 20,000-square-foot space.
Elsewhere in the city, AI startups, including Hayden AI, Anthropic and Tome AI, have collectively leased more than 75,000 square feet, according to CoStar data and a Cushman & Wakefield report.
Adept AI Labs is said to be working on a deal to lease roughly 35,000 square feet at 350 Rhode Island St. in San Francisco's Showplace Square neighborhood.
Green Shoots of Growth
City officials and real estate stakeholders are pinning their hopes on the burgeoning AI sector to help revitalize San Francisco's struggling economy and kick-start leasing activity that has been largely stagnant in recent years. Mayor London Breed has even called the city "the AI capital of the world," pointing to the region's long-standing reputation as the epicenter for access to tech talent and venture capital funding.
"I think S.F. is by far the best place to start an AI company," OpenAI President Greg Brockman, whose San Francisco company created the ubiquitous ChatGPT chatbot, said at a recent AI conference in downtown San Francisco. The company is searching for more office space in the city, though Brockman said San Francisco still faces many challenges, including homelessness and a perception some officials harbor an anti-business sentiment.
The tech sector's faith in San Francisco's office market, and willingness to invest in it, is a boost of optimism for a city contending with plummeting valuations and leasing activity. Office-use rates are among the lowest in the country, according to data compiled by Kastle Systems. Usage still is about 45% below pre-pandemic levels.
In downtown San Francisco, the average vacancy rate among leased office buildings has jumped past 26% from the less than 7% reported in 2019, according to CoStar data. Large tech companies such as Meta and Salesforce have contributed hefty chunks to the nearly 13 million square feet of available sublease space across the market, adding even more pressure to declining rents and landlords competing with their empty listings.
While the sparks of activity created by the city's base of AI companies aren't enough to remedy San Francisco's vacancy woes, it's one of the few sources of new leasing demand.
"As the tech industry grows in San Francisco, so do other companies that feed off the growth in the tech sector," Yasukochi said. "The tech industry is the key to the real estate market turning around. We need more companies, not just AI, but big tech to come back with expansion plans because that's what really ends up moving the market."