Artificial intelligence has been a big boon for San Francisco’s real estate industry, but it’s not enough to make up for the market’s overall struggles.
Vacancy rates for office space in San Francisco hit a new record of 34.5% in the second quarter, up from 33.9% in the first quarter, 28.1% a year ago and 5% before the pandemic, according to a report released Monday by commercial real estate firm Cushman & Wakefield.
Meanwhile, average asking rents fell for the quarter to $68.27 per square foot, the lowest since late 2015 and below the $72.90 recorded last year and the 2020 high of $84.70.
San Francisco is struggling with the twin challenges of workers returning to offices after the COVID-19 pandemic and a slowing tech market that has led to mass layoffs across the industry. Technology companies have laid off more than 530,000 employees since the start of 2022, according to the website Layoffs.fyi. alphabet, Meta, Amazon, Tesla, Microsoft and Salesforce.
Helping to cushion the recent blow is the growing popularity of generative AI and the decision of a fast-growing startup to open a major office in San Francisco.
OpenAI, a market leader with a private valuation of more than $80 billion, announced in October that it would lease about 500,000 square feet of space in the Mission Bay area, its largest office lease in the city since 2018. Robert Sammons, senior research director at Cushman & Wakefield, said OpenAI continues to look for more space in the city.
Last year, OpenAI rival Anthropic subleased 230,000 square feet of Slack’s headquarters, and in May of this year, Scale AI Airbnb office building.
“San Francisco is certainly a hub for AI, but AI is not going to save the San Francisco commercial real estate market,” Sammons said. “It will help.”
While well-funded AI startups are signing big leases for new space, a larger trend is for tech companies, law firms and consulting firms to downsize their footprints as existing leases expire, Sammons said, reflecting a broader shift to hybrid work.
Sammons added that in many cases, companies are looking to relocate to higher-quality space in more desirable parts of the city as prices fall and employers need to be near restaurants and shops to lure workers back.
“Top-quality trophy spaces continue to perform well because occupants want to live in the best locations with the best amenities,” Sammons said.
Some of the city’s biggest employers, including Salesforce, Uber, visa and Wells Fargoare bringing employees back to the office for some parts of the week. That’s helped the Financial District, where vacancy rates remained at 34.2% on the North Side and 32.7% on the South Side as of the end of the quarter. In SoMa, historically a popular area for venture-backed startups, vacancy rates are nearly 50%.
SoMa is far from public transportation and has also been hit by the departure of major retailers. According to Cushman & Wakefield, vacant office space across San Francisco totaled 29.6 million square feet this quarter.
The firm said in its report that there are encouraging signs in the market, with absorption improving in the second half of the year and office employment stabilizing after a steep decline. But Sammons said there still appears to be room for rents to fall and vacancy rates to rise. Uncertainty surrounding the presidential election could be a factor in delaying new leases, he said.
“When there’s a big election, tenants sometimes put off making decisions,” he said.
WATCH: San Francisco commercial real estate vacancy rate hits record high
