OpenAI Inks 315K SF Office Lease in San Francisco

Generative AI pioneer OpenAI, which this month began a new funding round by setting its valuation at $150B, has doubled down on its rapidly expanding footprint in San Francisco with the largest office lease of the year in the city.

The ChatGPT maker has inked a deal for a 315K SF building at 550 Terry A. Francois Boulevard, a property in Mission Bay less than a block away from where Open AI is subleasing 485K SF from Uber, the San Francisco Business Times reported.

OpenAI’s deal late last year with Uber for 1455 and 1515 Third Street was the largest lease of 2023 in San Francisco’s struggling office market, where the generative AI boom is driving leasing demand but has yet to put a significant dent in the record-high vacancy rate.

The 20-year-old building at 550 Terry Francois formerly served as Old Navy’s headquarters until the Gap Inc. affiliate sold the asset to DivcoWest for $356M in 2022.

Preliminary data for the third quarter released last week by CBRE showed the record-high office vacancy rate in San Francisco ticking up to 37.3%, the latest consecutive quarterly increase in the city since the outbreak of the pandemic in Q1 2020.

The availability rate, which measures the availability of office space whether or not it is occupied, remained level at 39.1% in the third quarter. The 0.3% increase in the vacancy rate was due in part to social media giant X’s decision to exit its headquarters at 1355 Market Street.

San Francisco’s office sector registered negative net absorption of minus 550K SF in the third quarter. CBRE’s preliminary data does not include OpenAI’s latest lease deal, but it is not certain that the transaction will have any impact on the office vacancy rate, the Business Times reported.

DivcoWest said after acquiring 550 Terry Francois that it was planning to convert the property for life science use. Brokerages tracking the office market in San Francisco didn’t cite the building as available office property.

What is not in doubt is that the generative AI boom is driving demand for office space in San Francisco, accounting for more than a quarter of the leases signed in 2023 and on a similar pace thus far in 2024.

OpenAI competitor Anthropic inked a deal last year to sublease Slack’s 230K SF headquarters. In May, ScaleAI signed a deal to sublease nearly 180K SF from Airbnb at 650 Townsend Street.

Year-to-date leasing activity tracked by CBRE is just below 5M SF. Tenant requirements have held steady for the past two quarters at well over 6M SF, with CBRE currently tracking 27 AI companies seeking an estimated 1.1M SF.