AI Tenants 25% of San Francisco Office Leasing

The exponential growth of the AI sector in San Francisco in the past year is reflected in the rapidly expanding footprint of office space in the city being leased by AI tenants, which totaled 1.3M SF in 2023.

According to JLL, AI tenants accounted for 25% of the total office leasing activity in San Francisco last year. The demand for new space by AI tenants in 2024 is expanding: JLL is tracking 800,000 SF of requirements from AI tenants.

The AI sector stands out in San Francisco’s beleaguered office market as a growth sector with a rapidly expanding physical footprint. Leading GenAI players like Anthropic and OpenAI absorbed large blocks of office space at the end of last year; a wave of other AI tenants grabbed smaller spaces.

AI startups in San Francisco rapidly outgrow their original office footprints. Notion Labs, an AI-powered productivity startup that was launched in 2021, is shopping for a 100K SF space for its HQ, which currently occupies 65K SF, according to a report in the San Francisco Business Times.

Overall tenant requirements jumped to 6.3M SF in Q1 2024 in San Francisco, rising from 4.2M SF in the fourth quarter and nearly double the 3.4M SF notched in the Q1 2023, CBRE reported. Tenant requirements are approaching levels not seen since the pre-pandemic peak when requirements hit 6.8M SF.

It usually takes six to 18 months for the requirements of tenants shopping for space to translate into signed leases.

The AI boom has a tough hill to climb to cure the near-term malaise of San Francisco’s office market, which saw its vacancy rate hit 36.6% in Q1 2024 as total availability ticked up to 38.7%.

More traditional tech players, as well office tenants in the finance and legal services sectors, continue to reduce their footprints in the city, exacerbating the vacancies caused by the widespread adoption of remote and hybrid work.

Leasing activity in San Francisco’s office market dipped to 1.3M SF in the first quarter, down from 2M SF in Q4 2023, according to CBRE, which is estimating that 2024 will produce 6.5M SF of office leasing activity in the city this year.

Optimism generated by surging tenant requirements should be tempered by the fact that many tenants shopping for space are doing so because their current leases are expiring. A wave of leases that pre-date the pandemic—and were signed at pre-pandemic prices—are likely to offset the impact of the tailwind from the AI boom.

Nearly a third of the existing office leases in San Francisco are set to expire by the end of 2025. According to a report from Savills analyzing CompStak data, these will include a glut of leases that were signed in 2018 and 2019 with pricing that reflects the previous market peak.

According to CompStak data, nearly 85% of the office leases coming due in the city by the end of 2025 were signed prior to 2020; 32% of the leases coming due by 2025 were signed during the previous market peak in 2018 and 2019.

“The recent office leases signed by AI companies and future demand from other active AI companies are a welcome tailwind for the battered San Francisco market [but] the tech subsector is still unlikely to be enough to carry the market to smoother waters for the time being,” the Savills report said.