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AI Breathes Life Back Into SF Commercial Real Estate
The Boom Sparked by Artificial Intelligence Firms Throughout the San Francisco Bay Area Has Brought Increased Demand for Undervalued Commercial Real Estate
Michael Campbell
01 Oct
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The Boom Sparked by Artificial Intelligence Firms Throughout the San Francisco Bay Area Has Brought Increased Demand for Undervalued Commercial Real Estate
Post-pandemic San Francisco (SF) has resembled more of a deserted no-man’s land than the bustling tech epicenter that it’s known as. Countless businesses have closed their doors, and droves of people have packed their bags; both leaving the city for good with no plans of returning.
But in their absence, the artificial intelligence start-ups of today, are coming across The Golden Gate Bridge to replace the crypto companies and social media sensations of yesterday. AI is one of the newer ‘industries on the block’ throughout the Bay Area and Silicon Valley; however, these companies are making their presence known and bringing life back to the dead San Francisco commercial real estate market.
Prior to the shutdown brought on by the pandemic, San Francisco boasted some of the most sought out office space in the nation. The price per square foot far surpassed rent rates in nearly every other major metro area of similar size and density. But when companies were forced to go remote, demand for physical office space fell by the wayside. Vacancy rates throughout SF shot up to double digit territory; as high as 30 - 35% in some sections of Downtown.
However, the closing quarters of 2023 have shown signs of a comeback; primarily spurred by an influx of demand from rapidly expanding artificial intelligence companies. Hive AI - a software start-up focused on using AI to moderate digital content - recently subleased nearly 60,000 square feet of office space on First Street directly across from the Salesforce Tower. Before Hive stepped in, the location was the home base to cybersecurity firm Okta. Okta previously leased 14 floors at 100 First Street, but in 2021 they ditched the waterfront office and it sat vacant for two years. Hive will be upsizing from their existing 20,000 sq foot headquarters at 575 Market Street.
A handful of other up-and-coming AI companies such as Hayden AI, Anthropic and Tome AI, have collectively leased more than 75,000 square feet of office space throughout recent months. And Adept AI Labs is nearing the finish line on a new lease at 350 Rhode Island Street in San Francisco's Showplace Square neighborhood. Adept will be taking on 35,000 square feet at the building.
The recent uptick in commercial activity is a breath of fresh air for a San Francisco real estate market that’s been suffocated for the past few years with little to no trade throughout the city. Only time will tell if SF is on the verge of genuine correction, or if this is merely a blip along an ongoing downtrend across the struggling office sector.
Quick Takeaways
San Francisco’s Commercial Office Sector Tanked During the Pandemic
Post-Pandemic Vacancy Rates Crept As High As 35%
Young AI Start-Ups Are Gobbling Up Much of the Abandoned Office Space
170K Square Feet of San Francisco Commercial Office Space Has Been Locked Down by AI Companies Throughout Recent Months
On Another Note
✺ Single Family Rent Growth Slows to a 3-Year Low: July eked out a 3% year-over-year increase. This marks the 15th consecutive month of deceleration, but falls in line with pre-pandemic growth trends. — Corelogic
✺ The House of Representatives Hopes to Bail Out Commercial Real Estate Borrowers with This Newly Proposed Tax Bill: If passed, it will amend the tax code to make it easier for commercial real estate borrowers to defer taxes applied to their properties during loan modifications or debt restructurings. — Yahoo Finance
✺ We Need More Homes (Just Not In My Backyard): Redfin survey shows that 80% of respondents are in support of policies that promote homebuilding efforts; but only 33% are in favor of new apartment buildings in their neighborhood. — Redfin
✺ Distress Stretches Across the Hotel Sector: Fitch predicts a stagnant 0 - 2% RevPAR (Revenue Per Available Room) growth rate across the U.S. hotel sector for 2024. But the silver lining will be amongst the 5-Star hotels; as they further stated that the only subset of the asset class that will outperform are the ‘upscale hotels’. — Connect CRE
✺ Texans Are Sticking To Their Guns: According to the Fed Reserve of Dallas, Texas natives are most likely to ‘stick around’ in their home state of Texas, and least likely to move cross-country.— Dallas Fed
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