The expansion of AI technology has greatly benefited the real estate sector in San Francisco. However, it hasn’t been sufficient to offset the broader challenges faced by the market.

In the second quarter, the vacancy rate for office spaces in San Francisco escalated to a new high of 34.5%, according to a recent report from the commercial real estate company Cushman & Wakefield. This is an increase from 33.9% in the previous quarter, 28.1% in the same period the previous year, and merely 5% pre-pandemic.

Simultaneously, the average rental rate dropped to $68.27 per square foot in the quarter, the lowest since late 2015, down from $72.90 a year earlier and a peak of $84.70 in 2020.

San Francisco is currently grappling with the dual challenges of reestablishing office foot traffic post-Covid and a deceleration in the tech industry resulting in significant job layoffs. Since the onset of 2022, tech firms have cut over 530,000 jobs, as reported by Layoffs.fyi, with notable downsizing at key companies like Google, Facebook, Amazon, Tesla, Microsoft, and Salesforce.

Partially mitigating the impact lately has been the surge in popularity of generative AI and the decision of rapidly growing startups to establish large offices in San Francisco.

For instance, OpenAI, the leader in the market with a valuation surpassing $80 billion, disclosed in October that it had leased approximately 500,000 square feet in San Francisco’s Mission Bay neighborhood – marking the most significant office lease in the city since 2018. Robert Sammons, senior research director at Cushman & Wakefield, mentioned that OpenAI is actively seeking more space in the city.

Similarly, last year, OpenAI’s competitor, Anthropic, subleased 230,000 square feet at Slack’s headquarters. In May of this year, Scale AI secured a lease for around 170,000 to 180,000 square feet within Airbnb’s office building.

“San Francisco undeniably stands as the hub for AI, although AI alone cannot rescue the commercial real estate sector of the city,” remarked Sammons. “It can certainly provide some assistance.”

While well-funded AI startups are securing substantial leases for new spaces, the prevailing trend indicates that tech firms, legal practices, and consulting companies are striving to downsize their space requirements when existing leases expire, reflecting a general shift towards hybrid work models.

In numerous cases, organizations are seeking to relocate to superior quality spaces in more coveted areas of the city, due to reduced prices and the necessity for proximity to eateries and retail outlets to encourage employees to return, as highlighted by Sammons.

“The top-tier premium spaces continue to perform admirably, as tenants prefer locations with superior amenities in their vicinity,” noted Sammons.

Several prominent employers in the city, such as Salesforce, Lyft, Mastercard, and JPMorgan Chase, have started bringing back their staff to offices for at least part of the week. This return has notably impacted the financial district, where the vacancy rate stands at 34.2% on the northern side and 32.7% on the southern side by the end of the quarter. Conversely, in SoMa – historically favored by venture-capital-backed startups – the vacancy rate climbs to nearly 50%.

SoMa faces challenges due to its distance from major public transport options and has also suffered from significant retail closures. The total vacant office space in San Francisco for the quarter amounted to 29.6 million square feet, as per Cushman & Wakefield.

The company mentioned in its report that the market displays positive indications, with absorption expected to enhance in the latter half of the year and office employment figures stabilizing following a steep decline. Nevertheless, Sammons anticipated further rental price declines and increased vacancies. He suggested that uncertainty stemming from the upcoming presidential election might be a contributing factor deterring new lease agreements.

“At times, tenants postpone decision-making during major elections,” he pointed out.

VIEW: The commercial real estate vacancies in San Francisco have reached an unprecedented high