When news broke that Hive AI signed a lease for more than 57,000 square feet in a San Francisco office building next to the city’s iconic Salesforce Tower this July, it was big news around the industry. After all, a lease of this size—and a new one, not a renewal—in a city that has become the face of the nation’s office market struggles was a rare bright spot that deserved the attention it got.
It turns out the lease was not an anomaly or a one-off deal. It’s one of many office leases AI companies have inked in San Francisco in recent months, and what has led Mayor London Breed to declare the city the AI capital of the world. As the city’s AI footprint grows, driven by a huge increase in VC funding to the segment and a desire by AI upstarts to open offices in clusters, many city stakeholders and real estate industry professionals are hoping that the surge could help turn around the beleaguered office market.
The jump, in part, could be attributed to the release of ChatGPT to the public in November of last year. Once the generative AI tool was released, it quickly became a household name, created a lot of interest, and drove more investment into the space. Then, in January, Microsoft announced it was investing $10 billion into OpenAI, the maker of ChatGPT, triggering even more activity in the AI space. “We’ve already seen for some time a migration of VC toward AI, but that’s grown and transformed in the Bay Area and specifically San Francisco,” said Alexander Quinn, Senior Director of Research at JLL. The AI industry is making its mark on the city: AI firms lease space in 80 buildings around San Francisco, according to a June report from JLL.
The number of AI companies leasing space in San Francisco began to pick up late last year, not long after ChatGPT was released, and then quickly barrelled ahead through the first half of 2023. Quinn and his colleagues at JLL began to see the effects of skyrocketing interest in the industry on their list of tenants in the market for space, which measures the companies actively pursuing office space in San Francisco. At the end of the fourth quarter of 2022, there were around 3.9 million square feet of active tenant requirements in the city. Today, there are 5 million square feet of active tenant requirements, according to JLL.
Unlike a lot of tech companies and other industries where it’s not necessarily a must to be in the office to do the kind of work that they do, AI is an industry that prioritizes in-person work. “It’s about a concentration of skill sets and bouncing ideas off one another while going through the same process and wanting to do it with other professionals with the same problems,” said Quinn. “It’s not happening on Zoom; it’s happening in person. They have to collide with one another and need an ecosystem in place.”
At the moment, the Mission District is where a lot of that startup environment is happening and where the biggest concentration of AI companies have settled. It’s where OpenAI leased 100,000 square feet back in 2020 and where many have followed since. The neighborhood doesn’t actually have that much office space to offer, said JLL’s Quinn. As a result, the cluster that has formed in the Mission is slowly expanding to neighboring areas, including the South Financial District, Mission Bay, SoMa, and Potrero Hill, an area dubbed by some as “Area AI.” San Francisco’s office sector has a significant supply of sublease space, and a lot of AI companies just starting out are looking for plug-and-play space in the city that they can move into immediately rather than have to wait an extended period of time to build out a space. Several companies in the AI space have recently taken sublease spaces, including Hayden AI, which leased 41,000 square feet at 460 Bryant Street in SoMa, and Anthropic, which is set to lease the entirety of Slack’s 230,000-square-foot former headquarters at 500 Howard Street in SoMa.
Less than 12 months after the release of ChatGPT, the AI market is booming, and there’s still a long way to go. In San Francisco, there are roughly 2.3 million square feet in total office space occupied by AI firms, according to JLL. The firm is forecasting the city’s office market will have around 3 million square feet by the end of the year. Overall, the AI industry worldwide is expected to grow to $15.7 trillion and have an annual average growth rate of up to 30 percent, according to PwC. Based on that growth model, San Francisco could see 12 million square feet of space leased by AI companies by 2030, according to JLL’s Quinn, although that is a “highly speculative” figure. The Bay Area as a whole saw $22.7 billion of VC funding in the first half of 2023, which accounted for around 40 percent of the total nationwide, according to CBRE. That share goes up to 50 percent, or $5.7 billion, when looking at AI companies specifically.
Despite the promising growth potential expected in the market, AI alone cannot solve San Francisco’s deep-seated office market problems. Even if AI companies gobbled up 12 million square feet, the city currently has more than 25 million square feet of vacant space. “I think we anticipate this to be a positive booster to our market but not to solve our vacancy entirely within the city of San Francisco,” said Quinn. Though not a savior alone, AI’s growth in the city will help create a more balanced environment. “Rents would stabilize, certain cohorts of buildings could see rent growth—that’s the expectation now,” Quinn said. “But we’re still in the early stages of growth.”
While AI is posting the most meaningful growth of any industry in San Francisco’s office market at the moment, there are other emerging sectors that, combined with AI, could represent what the future of San Francisco’s office market will look like. “CleanTech,” which includes companies and tech that reduces environmental impacts and improves sustainability, is one of those sectors. Though companies in the space generally aren’t looking for office space, they are looking for flex research space. Life sciences is the other big one that industry experts see as helping buoy the city’s office market.
The higher interest rate environment has slowed down the soaring growth in the life sciences market, but it’s still a segment with deep roots in San Francisco and one that could help boost vacancy. City officials recently adopted legislation that helps streamline the process for developers to convert vacant offices into biotech space and relaxes certain requirements for eligible conversion projects.
There’s also hope that the tech industry, a sector San Francisco has long been synonymous with, will rebound, but no one is certain about when that will happen. A number of major tech companies that originally set policies allowing remote work have recently reversed those decisions and mandated more in-office work. Adding more fuel to this are some performance indicators that have implied there have been productivity losses, and especially IP creativity losses, as a result of less in-person work. Patent applications, for instance, declined for the third consecutive year in 2022, representing the longest downward trend since data on patents began to be published in 1973. “JLL believes, and other data suggests that organizations perform better in person, and that’s the debate happening across the U.S. and the globe,” JLL’s Quinn said. “We’re still figuring that out.”
AI is poised for huge growth over the next several years, and San Francisco, where industry leader OpenAI is headquartered and where many fellow companies in the segment have followed, is emerging as its major hub. The rapidly growing AI ecosystem in San Francisco will not, on its own, turn around the city’s office market. But it will certainly be an important part of the future of the city’s evolving office sector, along with other emerging industries that are growing their footprints, like cleantech and the biotech sector. The upheaval of the office over the past three years and advances in technology have led to changes in the composition of San Francisco’s office market users, and while it may take some time to shake out, it will likely be a good thing.