San Francisco Eclipses New York in Office Recovery

Few U.S. office markets have recovered to their pre-pandemic demand levels, but the picture is different in two AI hotspots.

San Francisco and New York City have surpassed their 2018-2019 demand, according to VTS, and so far this year, demand in San Francisco’s has eclipsed the Big Apple’s.

The mood has been more positive on a national level, despite a slow recovery in most markets.

First quarter office demand nationally hit its highest mark since 2020, according to real estate data and software company VTS. Across the markets tracked by VTS — Boston, Chicago, New York City, Washington, D.C., Seattle, San Francisco and Los Angeles — office demand reached 79 percent of its average between 2018 and 2019.

VTS’ monthly office demand index tracks square footage needs stated by tenants actively touring buildings in a given month relative to the total square footage observed in VTS’ network. CEO Nick Romito said VTS tracks 80 percent of office buildings across its select U.S. markets.

This allows the company to tally 99 percent of the incoming demand and the unique requirements of prospective tenants touring the market, he said.

The square footage currently sought by prospective tenants considering San Francisco is 14 percent greater than the city’s 2018-2019 average. This year marked the first time the demand in the city eclipsed its pre-pandemic numbers. New York City’s office demand sat at 91 percent of its pre-pandemic average, though the city has surpassed its 2018-2019 numbers a few times in recent years.

San Francisco’s vacancy rate is 28 percent, while Manhattan’s is just under 20 percent.

San Francisco’s explosion as the artificial intelligence capital of the world is driving demand. More than 370 prospective tenants entered the market between January and March, the most VTS has tallied since it began watching San Francisco more than a decade ago. Those tenants sought 6.3 million square feet of office space, a 124 percent year-over-year increase.

Tech companies, including AI, accounted for 64 percent of the square footage demand.

The next closest industry was finance, with 11 percent.

The first quarter saw 67 new artificial intelligence companies search for space within San Francisco, looking for an average of 79,000 square feet.

However, this number is skewed by Anthropic’s 460,000 square-foot lease on Howard Street, Open AI’s 280,000 square-foot expansion in Mission Bay,

Beyond AI, the recovery signals the changing culture of remote work. Until 2024, Romito said it was difficult for a tech company to hire anyone without offering at least a hybrid office-remote work week.

“Now it’s the opposite,” Romito told The Real Deal. “It’s a 180-degree turn that has had the single biggest impact on office leasing.”

For Romito, the national recovery is especially shocking considering the macro-pressures weighing down the market, from political and economic instability to the war in Iran.

“You would think demand would be softer, but no one seems to care,” Romito said. “The reality right now in the AI world is that things are moving so fast that none of the other stuff matters.”

Romito said despite the war, and the surging oil prices, the sentiment of the market seems to be “Who gives a shit? Let’s keep going.”