San Francisco's AI boom fails to stop real estate slide as vacancies hit new record

Office vacancies in San Francisco hit a new record in the second quarter and rental prices fell to their lowest level since 2015, according to Cushman & Wakefield.
San Francisco is benefiting from the artificial intelligence boom, with OpenAI, Anthropic and Scale AI signing major leases in the past year.
But the post-Covid trend towards hybrid working, coupled with mass layoffs across the sector, has led to a steady increase in vacancies.

Artificial intelligence has been a boon to San Francisco real estate. But it’s not enough to offset the broader challenges facing the market.

San Francisco’s office vacancy rate hit a new record high of 34.5% in the second quarter, according to a report released Monday by 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 facing a dual challenge: getting people back into the office after the Covid-19 pandemic and a tech market downturn 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.fyi, with major headcount reductions at Alphabet, Meta, Amazon, Tesla, Microsoft and Salesforce.

The blow has been softened in recent times by the growing popularity of generative AI and the move by fast-growing startups to open large offices in San Francisco. OpenAI, the market leader with a private valuation of more than $80 billion, announced last year that it was leasing about 500,000 square feet of space in the city’s Mission Bay neighborhood, the city’s largest office lease since 2018. Robert Sammons, a senior research director at Cushman & Wakefield, said OpenAI continues to look for more space in the city.

Last year, rival Anthropic also subleased 230,000 square feet at Slack’s headquarters. And in May of this year, Scale AI signed a lease for 170,000 to 180,000 square feet of space in Airbnb’s office building.

“San Francisco is undoubtedly the center of artificial intelligence, but artificial intelligence is not going to save the city’s commercial real estate market,” Sammons said. “It will help.”

While deep-pocketed AI startups are signing big leases for new space, the general trend is for tech companies, law firms and consulting firms to shrink their footprints as existing leases expire, Sammons said, reflecting the widespread shift to hybrid work. In many cases, companies are looking to move to higher-quality space in more desirable parts of town because prices have come down and employers need to be close to restaurants and shopping to entice employees to return, Sammons added.

“The top-quality trophy spaces continue 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 largest employers, including Salesforce, Uber, Visa and Wells Fargo, brought employees back into their offices for part of the week. That helped in the Financial District, where the vacancy rate is still 34.2% in the North Side and 32.7% in the South Side at the end of the quarter. In SoMa, which has historically been a popular neighborhood for venture-backed startups, the vacancy rate is nearly 50%.

The SoMa neighborhood is farther from public transportation and has also been hit by the departure of large retail companies. Office vacancies in San Francisco for the quarter totaled 29.6 million square feet, Cushman & Wakefield said.

The firm noted in its report that the market is showing positive signs, with absorption expected to improve in the second half and office employment stabilizing after a sharp decline. But Sammons said there appears to be more room for rents to fall and vacancies to increase. Uncertainty surrounding the upcoming presidential election could be a factor in delays in new leases being signed, he said.

“Sometimes tenants postpone making a decision when there are important elections,” he said.

WATCH: San Francisco Commercial Vacancies at Record High