Nearly a year after subleasing half of Uber’s shiny glass headquarters in Mission Bay, OpenAI has vacated its previous, humbler digs in the Mission, where it occupied a three-story, century-old, restored trunk factory.
Known as the Pioneer Building, the 37,104-square-foot property at 2181 Folsom St. also incubated the payment software unicorn Stripe before it migrated to a larger SoMa office, then decamped from the city altogether in 2019.
That sort of incremental growth cycle — a kind of startup puberty — is one San Francisco landlords and property owners are hoping plays out again with artificial intelligence firms as the city remains mired in the steepest commercial real estate downturn in recent memory.
Since Big Tech has slashed its office presence in the city by nearly half, enthusiasm has shifted to the pool of tenants in the emerging AI space, which is developing revolutionary products, drawing billions in VC dollars, and growing both headcount and office-space requirements.
According to research from real estate firm JLL, which represented the landlord in OpenAI’s sublease of Uber’s HQ, AI companies have leased more than 1.7 million square feet of office space since ChatGPT was released in late 2022 — a sharp increase after years of quiet, incremental growth.
For the year to date, AI companies have leased a total of 4.3 million square feet of offices in an otherwise contracting market.
“I don’t think [AI] is a bubble,” said Chris Pham, senior analyst at JLL. “It’s just a matter of time before it is widely adopted.”
To differentiate AI companies from the rest of the tech industry, Pham’s team examined companies whose primary source of revenue comes from AI development or machine learning products; those with AI subdivisions or manufacturers of semiconductors don’t count.
Taking a page from AI optimists, Pham likened the boom to the discovery of electricity, rather than just another novel app or service. As various industries find more uses for AI, more products and companies will spawn to support each ecosystem, he theorized — similar to the pattern seen in the advent of cloud computing and smartphones.
Citing PricewaterhouseCoopers projections about how much the industry will add to the country’s gross domestic product, Pham’s team estimates that AI companies might take up to 12 million square feet of office space in San Francisco by 2030.
It’s an encouraging stat, but AI alone won’t solve the problem of the city’s record-high empty offices, Pham said. Vacancy rates are nearing 40%, meaning there is nearly 30 million square feet of total space on the market — more than double the amount AI companies would fill under JLL’s projection.
While blue-chip companies like OpenAI, which is reportedly in talks to raise several billion dollars in new funding at a $100 billion valuation, are leading the charge for bigger space, most of the leasing activity will be in the small office segment, with seed-stage or Series A companies, Pham said.
“We can’t forget that some of these companies will fail,” Pham said. “But this [market segment] is where all the growth potential is at the moment.”
Veteran office broker Jim Walker sees a similar picture.
Around this time last year, the Kidder Mathews agent helped his client Hive AI expand its offices from 20,000 square feet to more than 57,000 by subleasing three floors at 100 First St. that belong to software company Okta.
According to Kidder Mathews’ research, of the 570-plus office leases that have been signed this year in San Francisco, almost 70% are for spaces under 5,000 square feet.
“It’s gotta start somewhere,” Walker said, adding that professional and financial service firms are also jumping into the fray now that rents are bottoming out. “Creative [office] spaces, especially those with shorter terms or exposed brick, have a higher demand.”
The biggest difference from previous recovery cycles is the widespread adoption of remote or hybrid work — which, despite a few notable exceptions, doesn’t appear to be letting up anytime soon.
Therefore, it’s no coincidence that all of the AI deals have been subleases: Open AI with Uber, Anthropic with Slack, and Scale.ai with Airbnb.
“The real hole in the market still is these larger floor plates,” Walker said. “We just don’t have anywhere near the same foot traffic as we did pre-pandemic. You just hope these seeds we’re planting now eventually grow into something bigger.”