San Francisco Real Estate Slides Unhindered by Artificial Intelligence Boom as Office Vacancies Reach New Record

Bijie.com Report:
Artificial intelligence has always been a blessing for the San Francisco real estate market. However, this is not enough to compensate for the broader struggles in the entire market. According to a report from commercial real estate company Cushman & Wakefield on Monday, the vacancy rate of office spaces in San Francisco reached a new record of 34.5% in the second quarter. This proportion is higher than the 33.9% in the first quarter, the 28.1% in the same period last year, and the 5% before the pandemic. Meanwhile, the average asking price for this quarter dropped to $68.27 per square foot, the lowest level since the end of 2015, lower than the $72.90 in the same period last year and the peak of $84.70 in 2020. After the COVID-19 pandemic, San Francisco is facing a dual challenge of bringing people back to the office, while the slowdown in the tech market has led to large-scale layoffs in the entire industry. According to the statistics from the website Layoffs.fyi, since the beginning of 2022, tech companies have laid off more than 530,000 people, and companies such as Alphabet, Meta, Amazon, Tesla, Microsoft, and Salesforce have all conducted large-scale layoffs. Recently, the popularity of artificial intelligence and the rapid growth of startups deciding to open large offices in San Francisco have alleviated this blow. The private valuation of market leader OpenAI has exceeded $80 billion. The company announced in October that it will lease approximately 500,000 square feet of space in the Mission Bay community, the largest office lease in the city since 2018. Robert Sammons, Senior Research Director at Cushman & Wakefield, said that OpenAI is continuing to look for 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 signed a lease for 170,000 to 180,000 square feet of office space at Airbnb. Sammons said, “San Francisco is certainly the center of artificial intelligence, but artificial intelligence will not save the city’s commercial real estate market.” “This will help.” Although well-funded artificial intelligence startups are signing large lease contracts for new spaces, Sammons said the bigger trend is that tech companies, law firms, and consulting firms want to reduce their office space when their existing leases expire, reflecting a widespread shift towards hybrid work. Sammons added that in many cases, companies want to relocate to higher-quality spaces in more desirable areas of the city because prices have dropped, and employers need to be close to restaurants and shops to bring employees back. Sammons said, “The best trophy spaces continue to perform well because tenants want to be in the best locations with the best amenities.” Some of the city’s top employers, including Salesforce, Uber, Visa, and Wells Fargo, have already brought employees back to the office for part of the week. This has helped in the financial district, where the vacancy rate was still 34.2% on the north side and 32.7% on the south side at the end of this quarter. SoMa has always been a popular area for venture capital-backed startups, with an almost 50% vacancy rate. SoMa is further away from public transportation options and has also been affected by a significant exodus of retail. Cushman & Wakefield stated that there is a total of 29.6 million square feet of vacant office space in San Francisco this quarter. The company stated in its report that there are positive signs in the market, and absorption is expected to improve in the second half of the year, with the number of office jobs stabilizing after a sharp decline. However, Sammons said that there seems to be more room for rent reductions and an increase in job vacancies. He said that uncertainty surrounding the upcoming presidential election may be a factor in delaying new leases. He said, “Sometimes tenants postpone making decisions during major elections.”