Artificial intelligence has been a big boon for real estate in San Francisco. But it’s not enough of one to offset the broader struggle across the market.
The vacancy rate for office space in San Francisco hit a new record 34.5 percent in the second quarter, according to a report Monday from commercial real estate firm Cushman & Wakefield. That’s up from 33.9% in the first quarter, 28.1% in the same period a year ago 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, from $72.90 a year earlier and a peak of $84.70 in 2020.
San Francisco is reeling from the twin challenges of getting people back to the office after the Covid pandemic and a slowdown in the tech market that has led to massive job cuts across the industry. Tech companies have laid off more than 530,000 employees since the start of 2022, according to the website Layoffs.fyiwith significant shrinkage at Alphabet, After, Amazon, Tesla, Microsoft and Salesforce.
Softening the blow lately has been the growing popularity of genetic artificial intelligence and the decision by fast-growing startups to open large offices in San Francisco.
OpenAI, the market leader with a private valuation exceeding $80 billion, was announced in October that it leased about 500,000 square feet of space in the Mission Bay neighborhood, the largest office lease in the city since 2018. Robert Sammons, senior director of research at Cushman & Wakefield, said OpenAI continues to look for more space in the city.
Also last year, OpenAI rival Anthropic sublet 230,000 square feet at Slack headquarters. And in May of this year, Scale AI signed a lease for a reported 170,000 to 180,000 square feet of space Airbnb Office bulding.
“San Francisco is certainly the center of AI, but AI is not going to save San Francisco’s commercial real estate market,” Sammons said. “Will help.”
While richly capitalized AI startups are signing big leases for new space, the bigger trend is that tech companies, law firms and consulting firms are looking to reduce their footprint when existing leases come up, Sammons said, reflecting the broad transition in hybrid work.
In many cases, companies are looking to relocate to higher-quality space in more desirable parts of the city because prices have fallen and employers need to be near restaurants and shops to keep staff coming back, Sammons added.
“Top quality trophy space continues to perform well because tenants want to be in the best locations with the best amenities around them,” Sammons said.
Some of the city’s top employers, including Salesforce, Uber, Visa and Wells Fargo, brought employees back to the office for part of the week. That helped the financial district, where the vacancy rate was still 34.2% on the north side and 32.7% on the south side at the end of the quarter. In SoMa, which has historically been a popular area for business-backed startups, the vacancy rate is nearly 50 percent.
SoMa is farther from mass transit options and has also been hit by major retail departures. Vacant office space in San Francisco for the quarter totaled 29.6 million square feet, Cushman & Wakefield said.
The company said in its report that there are positive signs in the market, 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 to lower rents and increase vacancies. Uncertainty surrounding the upcoming presidential election may be a factor delaying new leases, he said.
“Sometimes tenants put off making decisions when there’s a big election,” he said.
I’M WATCHING: Commercial real estate vacancies in San Francisco are at an all-time high
