Artificial intelligence leads office rebound in San Francisco

Artificial intelligence has brought smiles to the faces of beleaguered office landlords in San Francisco.

A quarter of all leasing activity in the city since last year was inked by AI tenants, the San Francisco Business Times reported, citing figures from CBRE.

AI companies account for the majority of net positive new demand — meaning the sector is the only one growing its tenant footprint in San Francisco, Colin Yasukochi, executive director of CBRE’s tech insights center, told the newspaper.

Overall office vacancy in San Francisco has hit a record 37 percent, according to CBRE. San Francisco’s 89 million-square-foot office market had 33 million square feet of vacant workplaces in the second quarter

Prominent publicly traded landlords spoke optimistically about the city’s office market in the second quarter, citing AI’s growth potential.

New York-based Paramount Group, which has a 4 million-square-foot office portfolio in San Francisco, reported “clear signs” that demand for office space in the city is picking up.

The increase is in large part attributable to newly funded AI companies that are emphasizing in-person work and collaboration, Peter Brindley, head of real estate for Paramount, said during an earnings call.

“We feel a lot more optimistic today than we did going back, call it, six months,” Brindley told analysts, adding that the city “seems to be moving in a better direction.”

For Victor Coleman, CEO of Los Angeles-based Hudson Pacific Properties which owns 2.5 million square feet of offices in San Francisco, improvements stretched across its West Coast markets.

Crime is down, he said on an earnings call, while public transit ridership is up, sublease availability is declining and demand for offices is growing.

“Nowhere is this more evident than in San Francisco,” Coleman told analysts, noting that AI is “reigniting” the city’s office market. 

This year, he said, is “on pace to be another significant AI leasing year” in San Francisco.

AI has had a footprint in San Francisco for a decade, according to the Business Times. But the sector caught fire last year, when AI firms signed new leases in and around a Downtown left for dead after a broad shift to remote work.

OpenAI and Anthropic created a commercial real estate sensation by signing two of the largest office leases since the pandemic. 

Los Angeles-based Kilroy Realty, which owns a 3.4 million-square-foot portfolio in Downtown San Francisco, is tracking “about 600,000 square feet more of deals” involving AI tenants close to the finish line, according to Robert Paratte, chief leasing officer for Kilroy. 

AI, Paratte said, is “really ramping up.”

Many of the new entrants to San Francisco’s office market are early-stage AI startups that are taking just a few thousand square feet of space at a time, market observers say.

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JLL expects the sector’s footprint in San Francisco will reach 12 million square feet by 2030, up from less than 4 million square feet.

“One of these companies could be the next Google or Facebook just based on their current trajectory,” Chris Pham, a senior analyst at JLL’s San Francisco-based research office, told the Business Times in June.

— Dana Bartholomew