The AI hype train has some looking to the nascent industry as a solution for Downtown San Francisco’s woes. But a closer look at the city’s office market reveals a more complicated picture.
Two major San Francisco leases from blue-chip companies in the AI space are reportedly in the works, representing some of the city’s largest lease signings of the year. Critically, these firms are taking on new space instead of renewals—a sign that offices are still in demand for some growing firms.
While these potential agreements offer a glimmer of hope for the city’s struggling commercial real estate, simple math suggests AI won't be an instant savior in a market where companies have steadily shed office space, resulting in a vacancy rate surpassing 30%.
Mayor London Breed has declared San Francisco the AI Capital of the World—and although the city’s government may be a bit behind peer cities in using the technology—there’s no denying that money talks.
During the first half of 2023, the Bay Area garnered $22.7 billion of venture capital funding, accounting for approximately 40% of the total nationwide, according to research from commercial real estate firm CBRE. The proportion goes up to 50%—equivalent to $5.7 billion—when looking specifically at AI companies.
That fountain of capital, alongside San Francisco’s concentration of top engineering talent, has meant some of the recently established brand names in the AI space, including OpenAI, Anthropic and ScaleAI, call the city home.
Anthropic, the developer of AI assistant Claude, is circling a roughly 230,000-square-foot sublease of Slack’s former headquarters at 500 Howard St. The Chronicle first reported news about the lease, which Salesforce CEO Marc Benioff mentioned on the company’s second-quarter earnings call. Salesforce purchased Slack in 2021 in a deal worth $27.7 billion.
In a similar vein, OpenAI is apparently on the verge of signing a deal to take 287,000 square feet of space at 1725 Third St., a Mission Bay office building adjacent to Chase Center, according to the San Francisco Business Times.
Neither deal has yet to be officially signed, but the two deals are a major chunk of current tenant demand from AI companies, estimated at up to 1 million square feet. For context, analysts estimate around 4.6 million in current tenant demand in San Francisco’s market, including both renewals and new leases.
But the reported deals also underscore the scale needed to reverse the trajectory of Downtown offices that were left vacant by major tech firms during the pandemic. Both OpenAI and Anthropic’s reported deals combined are a fraction of the 1.5 million square feet vacated in San Francisco by Salesforce alone.
Colin Yasukochi, executive director of the CBRE Tech Insights Center, said AI companies are unlikely to turn the market around by themselves. Instead, a more accurate way to think about the industry is as the engine for the next tech boom.
“It’s more along the lines of when the smartphone became more mainstream in the late 2000s to 2010s, which created business opportunities for all these technology companies that we didn't even know could exist at the time,” Yasukochi said. “What’s happening now could be the catalyst for a much larger growth story a couple of years in the future.”
He noted that while AI companies make up only around a quarter of total market demand, they represent around 75% of new leasing growth.
“As a group, these companies are more than doubling the size of what they currently have,” Yasukochi said. “It’s starting to return demand into the marketplace, which is a good thing. But as you know, we have a whole lot of supply out there.”
Currently, there are roughly 14 million square feet in direct Class A space directly available for lease in the city, with an additional 7.5 million square feet in sublease space.
Anthropic’s lease would make up a little more than half of the space Slack vacated in the past two years as it consolidated its offices with Salesforce. In the case of 1725 Third St., the building was initially envisioned to be part of Uber’s headquarters campus in Mission Bay. The fully furnished property was never even occupied before being marketed to tenants.
The potential deals add to a growing tally of AI leases in recent months:
While there are few, if any, AI tenants currently looking for a similar amount of space as OpenAI and Anthropic, there are a handful looking for more modest leases in the 50,000-75,000-square-foot range. There are also a number of startups looking to plant roots in the city.
The signings show the geographical footprint for the spread of the AI industry in San Francisco. A number of startups have clustered in the Inner Mission and Potrero Hill around OpenAI’s headquarters space in a submarket dubbed “Area AI” by some real estate professionals.
Large deals have also been signed Downtown in and around the Financial District as high-growth companies look for available space that is close to open amenities and mass transit.
Based on the rate of growth for the AI industry, real estate firm JLL forecasts demand for office space in San Francisco to grow to up to 14 million square feet by 2030.
“The city’s shed around 16 million square feet of occupancy since 2020, so a million square feet of AI tenants in the market right now is a good start, but it’s still a long way to go,” said Derek Daniels, the Bay Area research director for Colliers. “We’re seeing more smaller firms now hunting for space. It starts there, but it’s a long road to get to a stabilized vacancy of around 10%.”
Kevin Truong can be reached at firstname.lastname@example.org