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- San Francisco's commercial real estate market has seen a recent peak in demand.
- The city may have the recent AI boom to thank for the boost, experts say.
- For the last few years, the once-hot market has been struggling to keep pace with the rest of the US.
San Francisco's commercial real estate market has been struggling in recent years. Storefronts, hotels, and office buildings have been moving out of the city at such a rate some have dubbed it a "doom loop."
It has also seen tech companies drastically reduce their presence. Meta, PayPal, and Snap have all slashed office space in the city in recent years. Meanwhile, the city is facing a devastating homelessness problem and a concerning shift in crime patterns.
"San Francisco used to have the lowest office vacancy in the US of any major market," Alexander Quinn, director of research at real estate company Jones Lang LaSalle, told Insider. "Vacancy is now at around 28% which would put it at the highest of any major market in the US," he added.
The pandemic was the major culprit behind this decline, Nick Romito – CEO of commercial real estate leasing and asset management platform VTS – told Insider.
"San Francisco was a white-hot market driven mostly by technology. To go from that to quite literally the worst market in the country over the course of two years is kind of unprecedented," he said.
But things are starting to turn around for San Francisco's faltering commercial real estate market and the city may have artificial intelligence to thank for it.
The excitement around generative AI since the launch of Open AI's ChatGPT in November has spurred a flood of investor interest in major companies and start-ups alike. Now, some appear to be hunting for more office space.
According to data from VTS, San Francisco saw a recent boom in demand, experiencing a 10.2% demand increase in the most recent quarter. Romito links a lot of this increase to the recent AI boom. OpenAI, for example, is headquartered in San Francisco's Mission District.
"There's certainly enough capital to cause a nice leap in demand," he said, pointing to the estimated $11 billion worth of funding poured into San Francisco-based AI companies this year. The figure accounts for nearly half of all funding for AI startups worldwide, according to data from PitchBook.
"Pretty much all the data points to this demand coming from companies that are tangentially connected to AI," Romito said.
It's perhaps unsurprising that AI companies seem to have San Francisco in their sights. The city is home to 11 of the top-funded companies in the sector, according to data from VC firm NFX, which was shared with Insider by San Francisco's Office of Economic and Workforce Development. These companies include OpenAI, Anthropic, and Adept AI.
"Specifically in San Francisco we are at the epicenter of artificial intelligence," Quinn said, "as a result that's pushing us into growth in that sector and we are seeing growing requirements."
Quinn said JLL had 10 AI clients eyeing around 750,000 to one million square feet of San Francisco real estate. One AI company, Hive, recently announced it was subleasing three floors of a downtown San Francisco office — taking over space previously occupied by software company Okta, Bloomberg reported.
"They have a pretty strong remit to be in the office," Quinn said of AI companies. "It's driving demand which was really muted just three quarters ago — now we're seeing a rise in our tenant requirements in San Francisco."
VTS's Romito said the vast majority of demand in the city in the last quarter was for smaller spaces, signaling recently-funded companies with fresh capital.
He's also optimistic about this demand keeping up for the rest of the year.
"I would assume for the remainder of this year AI is going to be the most active segment of technology," he said. "You're going to continue to see a lot of these AI deals carry a lot of capital."
from All Content from Business Insider https://www.businessinsider.com/artificial-intelligence-companies-are-flocking-to-san-francisco-2023-8
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