The rapidly expanding sector leased more than 1.3M SF in 12 months.
The rapid growth of the AI sector in San Francisco over the past year is reflected in the rapidly expanding footprint of office space leased by AI tenants in the city, totaling 1.3M SF in 2023.
AI tenants accounted for 25% of total office leasing activity in San Francisco last year, according to JLL. Demand for new space from AI tenants is increasing in 2024: JLL is tracking 800,000 SF needs from AI tenants.
The AI sector stands out as a growth sector in San Francisco’s troubled office market with rapidly expanding physical implications. Leading GenAI players such as Anthropic and OpenAI absorbed large blocks of office space late last year; A wave of other AI tenants took over the smaller spaces.
AI startups in San Francisco are quickly expanding beyond their original office footprints. Notion Labs, an AI-powered productivity startup launched in 2021, is buying 100K SF of space for its headquarters, which currently occupies 65K SF, according to a report. San Francisco Business Times.
Overall tenant demand reached 6.3M SF in San Francisco in Q1 2024, up from 4.2M SF in the fourth quarter and nearly double the 3.4M SF reported in Q1 2023, CBRE reported. Tenant needs are approaching levels not seen since the pre-pandemic boom when needs reached 6.8M SF.
It typically takes six to 18 months for tenants purchasing space to translate into signed leases.
The AI boom has a tough hill to climb to overcome the near-term weakness of San Francisco’s office market, which saw its vacancy rate climb to 36.6% in Q1 2024 as total availability fell to 38.7%. reached
More traditional tech players, as well as office tenants in the finance and legal services sectors, continue to reduce their footprints in the city, and widening the adoption of remote and hybrid work increases vacancies.
Leasing activity in San Francisco’s office market fell to 1.3M SF in the first quarter, down from 2M SF in Q4 2023, according to CBRE, which estimates office leasing in the city to peak this year in 2024. The activity will generate 6.5M SF.
The optimism stemming from increased tenant needs must be balanced with the fact that many tenants shopping for space are doing so as their current leases expire. A wave of leases that predate the pandemic — and were signed at pre-pandemic prices — could potentially offset the tailwind effects of the AI boom.
About a third of the current office leases in San Francisco are set to expire by the end of 2025. These will include a large number of leases signed in 2018 and 2019 that reflect pricing, according to a report by Savills, which analyzed CompStak data. Last market peak.
About 85% of office leases coming up in the city by the end of 2025 were signed before 2020, according to CompStak data. 32% of leases due 2025 were signed during the previous market peak in 2018 and 2019.
“Recent office leases signed by AI companies and future demand from other active AI companies is a boon for San Francisco’s struggling market. [but] The tech sub-sector is not yet big enough to lead the market to smooth waters,” the Savills report said.