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Despite the booming artificial intelligence sector, San Francisco’s real estate market continues to face significant challenges, with office vacancies reaching a record 34.5% in the second quarter, according to a report released Monday by commercial real estate firm Cushman & Wakefield. This marks an increase 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 has also fallen, dropping to $68.27 per square foot, the lowest since late 2015. This is down from $72.90 a year ago and a peak of $84.70 in 2020. San Francisco’s real estate market struggles are attributed to the slow return of workers to offices post-Covid and a tech market downturn leading to mass layoffs. Since the start of 2022, over 530,000 tech employees have been laid off, with major downsizing at companies like Alphabet, Meta, Amazon, Tesla, Microsoft, and Salesforce.
Generative AI’s popularity and the decision by fast-growing startups to open large offices in San Francisco have provided some relief. OpenAI, valued at over $80 billion, announced in October that it was leasing approximately 500,000 square feet in the Mission Bay neighborhood, the largest office lease in the city since 2018. OpenAI is reportedly seeking more space in the city. Additionally, OpenAI rival Anthropic subleased 230,000 square feet at Slack’s headquarters, and in May, Scale AI signed a lease for 170,000 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,” said Robert Sammons, senior research director at Cushman & Wakefield. “It will help.”
While AI startups are signing large leases, the broader trend sees tech companies, law offices, and consulting firms reducing their office space due to the shift to hybrid work. Many companies are relocating to higher quality spaces in more desirable parts of the city, benefiting from reduced prices and the need to be near amenities to attract staff back to the office.
“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 said.
Top employers like Salesforce, Uber, Visa, and Wells Fargo have implemented partial return-to-office policies, benefiting the financial district, though vacancy rates remain high at 34.2% on the north side and 32.7% on the south side. In SoMa, historically popular with venture-backed startups, the vacancy rate is almost 50%. SoMa’s distance from mass transit and significant retail departures have exacerbated the situation.
Cushman & Wakefield reported that vacant office space in San Francisco totaled 29.6 million square feet in the quarter. The firm sees positive signs, with potential absorption improvements and stabilizing office job numbers in the latter half of the year. However, Sammons warns of further potential rent declines and rising vacancies, with uncertainty surrounding the upcoming presidential election possibly delaying new leases.
“Sometimes tenants postpone making decisions when there are major elections,” Sammons added.