San Francisco Real Estate Struggles Amid Record Office Vacancy Rates, Despite AI Boom

San Francisco’s real estate market is facing significant challenges, with office vacancy rates reaching an unprecedented 34.5% in the second quarter of 2023, according to a report by commercial real estate firm Cushman & Wakefield. This figure is up from 33.9% in the first quarter and 28.1% in the same period last year, a stark contrast to the 5% vacancy rate before the pandemic.

The average asking rent for office space in the city has also plummeted, dropping to $68.27 per square foot, the lowest since late 2015. This marks a decline from $72.90 a year earlier and a peak of $84.70 in 2020.

San Francisco’s commercial real estate woes are largely attributed to two major factors: the struggle to bring employees back to the office post-Covid and a slowdown in the tech sector, which has led to over 530,000 layoffs since 2022, according to Layoffs.fyi. Major tech companies like Alphabet, Meta, Amazon, Tesla, Microsoft, and Salesforce have all experienced significant downsizing.

However, the burgeoning field of generative AI has provided a glimmer of hope. Rapidly expanding AI startups are leasing large office spaces in San Francisco, helping to mitigate some of the impact. OpenAI, valued at over $80 billion, announced a lease for approximately 500,000 square feet in the Mission Bay neighborhood last October, marking the city’s largest office lease since 2018. OpenAI continues to seek additional space in the city, according to Robert Sammons, senior research director at Cushman & Wakefield.

Other AI companies are also making significant moves. Last year, OpenAI competitor Anthropic subleased 230,000 square feet at Slack’s headquarters, and in May, Scale AI signed a lease for up to 180,000 square feet in Airbnb’s office building.

“San Francisco is certainly the center of AI, but AI is not going to save the San Francisco commercial real estate market,” Sammons said. “It will help.”

Despite these positive developments, the broader trend remains concerning. Many tech companies, law offices, and consulting firms are reducing their office footprints as leases expire, reflecting the widespread shift to hybrid work. Companies are also relocating to higher quality spaces in more desirable parts of the city, driven by lower prices and the need to attract staff with nearby amenities.

“The best quality trophy space continues to perform well because tenants want to be in the best locations with the best amenities around them,” Sammons added.

While some of the city’s top employers, including Salesforce, Uber, Visa, and Wells Fargo, have brought employees back to the office part-time, the vacancy rate remains high. The financial district saw vacancy rates of 34.2% on the north side and 32.7% on the south side by the end of the quarter. In the SoMa district, historically popular with venture-backed startups, the vacancy rate is nearly 50%.

SoMa’s high vacancy rate is compounded by its distance from mass transit options and the departure of large retailers. Overall, vacant office space in San Francisco totaled 29.6 million square feet for the quarter.

Cushman & Wakefield’s report noted some positive signs, with absorption expected to improve in the second half of the year and office job numbers stabilizing after a steep decline. However, Sammons cautioned that there is still potential for rents to fall further and vacancies to rise, with uncertainty surrounding the upcoming presidential election possibly delaying new leases.

Financial Desk