Amidst San Francisco’s high-priced office market, a glimmer of hope has emerged as rents for office towers show signs of flexibility. This development aligns with the growing interest and investment in artificial intelligence (AI). As a result, there is increasing speculation about the potential impact of AI companies on revitalizing the city’s struggling office market.
In a significant proclamation, Mayor London Breed recently declared San Francisco the global “AI capital.” Research confirms that both San Francisco and Silicon Valley have consistently secured the highest levels of venture capital funding for AI companies since 2018. Those who anticipate this investment to translate into increased leasing activity within the city’s vacant office towers have a new deal to showcase as evidence of this trend.
Hive, a cloud-based AI company, has exceeded the capacity of its current office, spanning approximately 20,000 square feet at 575 Market St. in San Francisco’s Financial District. In a notable move, Hive, which achieved a valuation of $2 billion in 2021, recently finalized a lease agreement for a larger space within the 27-story office tower located at 100 First St., owned by Kilroy Realty.
The new premises of Hive cover an expansive area of nearly 60,000 square feet, spanning three floors. Previously occupied by cybersecurity company Okta Inc., the building currently accommodates Okta on 14 floors under a lease agreement until 2028. In early 2021, Okta listed the floors that Hive will soon occupy for sublease.
AI Companies’ Office Space Preferences in San Francisco
In June, JLL, an esteemed real estate company, identified 80 locations in San Francisco where AI companies currently lease office space. Notable tenants on the list include renowned players like OpenAI, Cruise (a self-driving car company), Github, and Niantic Labs (the developer of the popular augmented reality mobile game Pokemon Go).
Although the majority of these companies are concentrated in the Financial District, South Beach, and SoMa, an emerging cluster is forming on the outskirts of the Mission District, where OpenAI is situated.
JLL Tracks Growing Demand
Based on a recent report by Raise Commercial Real Estate, the total venture capital (VC) funding raised in San Francisco in 2023 experienced a significant decline of 49% compared to the first half of 2022. However, companies based in San Francisco still managed to secure a substantial $82 billion in funding this year. Notably, the AI industry accounted for 30% of the funds raised, highlighting its prominence and attractiveness to investors.
Generative AI has garnered immense attention, fueling substantial growth in the Bay Area. PwC forecasts it to become a $15 trillion economy by 2030, with an impressive annual growth rate of 30%. At the epicenter of this thriving industry, Alexander Quinn, JLL’s director of research for Northern California, stated, “We estimate that JLL is currently monitoring over 800,000 square feet of new space requirements from AI companies in the city.” Despite the surging demand, only a few deals have been finalized thus far, but experts anticipate a shift in the upcoming months.
AI Boom Still in The Early Stage
According to Colin Yasukochi, Executive Director of CBRE’s Tech Insights Center, several AI startups initially emerged in Hayes Valley, affectionately known as ‘Cerebral Valley,’ where founders operated from home. However, as these startups grow, they seek larger office spaces to foster collaboration and expand their teams.
Yasukochi explained, “Eventually, they have to migrate to the main downtown area, not necessarily the Financial District, but areas like SoMa, as peripheral locations lack sufficient office space.“
Despite this growing demand, San Francisco’s office vacancy rate has risen to nearly 32% in Q2, as reported by CBRE. Whether the increasing demand and momentum will chip away at this rate remains to be determined.
Yasukochi characterizes the impact of the “AI boom” on the San Francisco real estate market as still in the “early stage.”
As the AI industry continues to thrive and expand in San Francisco, the future of the city’s real estate market will be shaped by the ongoing evolution of these innovative startups and their increasing impact on office space demands.