Despite the AI growth, San Francisco’s real estate registered record office vacancies.

Introduction

Artificial intelligence has benefited real estate in San Francisco. However, this is insufficient to offset the wider challenges faced by the sector.

A survey released on Monday by commercial real estate firm Cushman & Wakefield stated that the second quarter’s office space vacancy rate in San Francisco hit a new high of 34.5%. This is higher than the 33.9% from the first quarter, the 28.1% from the same time last year, and the 5% from before the pandemic.

The average asking rent, which was $72.90 a year ago and peaked in 2020 at $84.70, fell to $68.27 per square foot in the quarter, the lowest since late 2015.

AI’s Role and Beyond

San Francisco is struggling to deal with the dual issues of getting people back to work following the COVID-19 epidemic and a slowdown in the tech sector that has resulted in widespread layoffs. Notable downsizings have occurred at Alphabet, Meta, Amazon, Tesla, Microsoft, and Salesforce.

The recent surge in popularity of generative AI and the move by rapidly expanding firms to establish sizable offices in San Francisco have mitigated the impact.

With a private valuation exceeding $80 billion, OpenAI is the market leader. The company announced in October that it was leasing the largest office deal in the city since 2018—roughly 500,000 square feet of space in the Mission Bay region. According to Robert Sammons, senior research director at Cushman & Wakefield, OpenAI is still searching the city for additional premises.

According to Sammons, “San Francisco is undoubtedly the center of AI, but AI won’t save the San Francisco commercial real estate market.” “It will be beneficial.”
While well-funded AI startups are signing significant leases for new space, the larger trend, according to Sammons, is that IT companies, legal offices, and consulting firms are looking to downsize when existing leases come up, reflecting the general shift toward hybrid work.

Navigating the Challenges

According to Sammons, companies are frequently trying to move to better spaces in more coveted areas of the city because rents have decreased, and businesses need to be close to eateries and retail establishments to entice employees to return.

During a portion of the week, people returned to work at several of the city’s largest firms, including Wells Fargo, Salesforce, Uber, and Visa. This has benefited the financial district, where at the end of the quarter, the vacancy rates were still 34.2% on the north side and 32.7% on the south side.

In addition to being farther from public transportation, the people have suffered from a high rate of retail closures. According to Cushman & Wakefield, there were 29.6 million square feet of unoccupied office space in San Francisco during the quarter.