AI Boom Spurs Hope of 2024 Office Recovery in San Francisco

San Francisco’s tattered office market may not have hit bottom, but the boom in generative AI startups appears to be lighting the path to a recovery in 2024.

First, we have to deliver some gloomy Q2 stats: San Francisco’s office market ended the first half of 2023 with a vacancy rate of 31.6% and an overall availability rate of 36.3%.

Negative net absorption accelerated in the second quarter due to slow leasing activity combined with a higher volume of lease expirations and several new sublease listings, CBRE said in a new market report.

Leasing activity in Q2 totaled 859K SF, a 36% decrease from the 1.35M SF of velocity in the first quarter. Net absorption in San Francisco’s office market was negative 1.83M SF, while the average asking rate for direct space dropped 2.1% to $73.59 FSG.

Only one office sale transaction occurred in Q2 in San Francisco, the sale of 40 Jessie Street, a building that traded for $476 per square foot.

“Sales activity has been slow for the past few quarters, but several CBD buildings are expected to trade for significant discounts in the coming months,” CBRE said.

However, there’s some light at the end of the tunnel: at the end of Q2, total tenant demand surged to 4.5M SF, a 36% increase from the first quarter and a 61% increase from the end of 2022.

“Venture capital-based tech companies have led the surge in new tenant activity, including several AI companies that are looking to expand their office footprints, come of them [by more than] 100K SF,” CBRE’s report said.

Since the beginning of the year, an estimated $20B in venture capital has poured into generative AI-focused startups globally, according to Crunchbase data, with the lion’s share—more than $14B—going to companies in the Bay Area. San Francisco now is widely expected to be lifted by the largest tech wave it has seen to date.

But first, the city has to ride out what has become a feedback loop of an office and retail exodus that has turned its downtown into a ghost town where public safety has become a primary concern.

This month, the malaise in downtown has spread to San Francisco’s convention business, with two major tech conferences withdrawing from their use of the Moscone Center as a perennial conference site.

Tech giants Meta and IBM separately have announced plans to cancel major conferences at the Moscone Center.

IBM’s Red Hat software subsidiary is moving its annual technology summit from San Francisco to Denver in 2024 and will hold the four-day event—which typically draws about 20K hotel visitors—in Orlando in 2025.

Meta canceled plans to host its Meta Business Group Summit next year, an event that fills about 16K hotel rooms, according to the San Francisco Travel Association.