San Francisco Office Market Struggles Despite AI Boom; Vacancy Rate Hits Record High

San Francisco’s office market continues to struggle despite the AI boom in the city. The vacancy rate hit a new record of 34.5% in Q2, while asking rents fell to their lowest since 2015.

AI companies expanding in San Francisco: The city has seen major leases from AI leaders like OpenAI, Anthropic, and Scale AI over the past year, benefiting from the surge in interest and investment in generative AI:

• OpenAI leased about 500,000 square feet in Mission Bay, the biggest office lease in San Francisco since 2018, and is looking for more space.
• Anthropic subleased 230,000 square feet at Slack’s headquarters in 2022.
• Scale AI signed a lease for around 170,000-180,000 square feet in Airbnb’s office building in May 2023.

Broader market challenges persist: Despite the AI bright spot, San Francisco’s office market continues to face headwinds from the shift to hybrid work and widespread tech layoffs:

• Companies are generally looking to reduce their footprints when leases come up for renewal, reflecting the move to hybrid arrangements.
• Many are relocating to higher quality spaces in desirable areas of the city, as prices have come down and employers need to be near amenities to attract workers back to the office.
• The vacancy rate remains high across submarkets, reaching nearly 50% in SoMa, a historically popular area for startups that has been impacted by retail departures and distance from transit.

Outlook remains challenging: While there are some positive indicators like absorption potentially improving in the second half and office job numbers stabilizing, uncertainty remains:

• Cushman & Wakefield believes there is still room for rents to fall further and vacancies to continue rising in the near-term.
• The upcoming presidential election could be a factor causing tenants to delay making decisions on new leases.