Artificial intelligence. Will it become the space consumer that whets the office market’s appetite for tenants?
The jury is still out on that question. But early indications look good.
“In a market as challenged as San Francisco, it’s a bright spot that’s growing,” said Derek Daniels, regional director of research at brokerage Colliers (CIGI). Its remit includes the San Francisco Bay Area, which includes San Francisco proper, and Silicon Valley, where many innovations in computer and information technology originate. “Companies are saying we’re going to commit to more space than ever before.”
In a rare bit of good news, the largest lease in the San Francisco office market in the fourth quarter of 2023 was OpenAI’s commitment to 486,600 square feet in the Mission Bay submarket at 1445 and 1515 Third Street, Daniels said.
And the second largest was AI startup Anthropic, which occupied 230,315 square feet at 500 Howard Street in the city’s southern financial district. Anthropic describes itself on its website as a company that “develops AI research and products that protect borders.” As for OpenAI, it introduced the popular content generator ChatGPT in November 2022.
Daniels said the big deals point to an AI industry that needs the traditional benefits of an office — a place where workers can come together, learn the company culture, bounce ideas off and collaborate. .
“No one can predict the future, but if investment in the AI space continues to grow, there’s no reason to believe Wall Street won’t help it expand its markets as others do. Tech users do,” Daniels said. “The industry grew out of Silicon Valley and spread to other markets. The Bay Area is currently the home of AI, but there’s no reason to believe it won’t spread out.
There is no shortage of frustrations in the commercial real estate, especially office market. In its national fourth-quarter office report, Colliers said the office market “limped” in 2023, and barely improved as the year went on. Nationally, the vacancy rate at the end of 2023 was 16.9 percent, up from a peak of 16.3 percent during the 2008 to 2010 global financial crisis.
According to Colliers, by the end of 2023 the Bay Area would have captured nearly 40 percent of global investment in AI. That didn’t stop San Francisco’s office vacancy rate from reaching a record 29 percent in 2023. And a recent survey of office entry swipes by security firm Castle Systems found that only 46 percent of workers in the San Francisco metro area used an office entry. A typical workday office, behind Kastle’s 10-city average of 51.8 percent and the New York City metro’s 52 percent.
In Colliers’ Manhattan office market report for January, availability — a measure that includes both space that is vacant and that is expected to become vacant in the next 12 months — was a record 17.9 percent.
AI firms will likely fill some of this available space in the coming weeks or months. For example, OpenAI has hired brokerage Raise Commercial to find about 60,000 square feet for its New York City office, the Commercial Observer reported last week. Also, Rokt, an e-commerce company that uses AI, announced a 34,000-square-foot expansion at its New York headquarters at 175 Varick Street in January. And Rippling, a human relations company that uses AI, opened a 69,000-square-foot office across from Spotify at 4 World Trade Center in lower Manhattan in early 2023. He received a tax break of $3.5 million From the Empire State Development Corporation (ESDC), a state agency that promotes economic development.
“Tech companies that use artificial intelligence in their business models often see New York State as a top business location,” ESDC spokeswoman Emily Majatovich said in an email.
A January report by brokerage Cushman & Wakefield found that AI-related tenants were seeking 1.7 million square feet of office space in New York. AI tenants in the San Francisco area alone are looking for more space — 2.5 million square feet in potential leases. Austin, Texas was just ahead of New York. Its numbers, though, were considered inconsistent because, according to C&W, more than half of its undistributed demand could be attributed to a single firm.
“Demand for space continues to grow,” said John McWilliams, a senior research analyst at Cushman & Wakefield and one of the report’s authors. “You’ve got demand for office space in multiple markets, you’ve got demand for data center space in multiple markets. Then there’s venture capital. With that comes demand for office space.
C&W reports that there is about 1.4 million square feet of unmet demand in the greater Seattle area, Amazon’s headquarters. The Washington, D.C. area has about 1 million square feet and the Los Angeles area about 300,000. The Los Angeles video game industry “frequently uses AI in its games,” the researchers wrote.
There are at least two caveats that still require time to play out. One is whether these are the same people who brought us the tech revolution, only with more knowledge, thus increasing office demand at best negligible. (Note that much older stalwarts like law firms and investment houses continue to drive leases in New York, for example.) Another is whether AI workers are as susceptible as others to wanting to work from home. are or at least part of the workweek in another remote location, thereby silencing the industry’s need for office space.
CompStak, a research firm that tracks leases, reports that AI has a “limited” presence in New York. Overall, tech’s share of the New York City office market fell to 5.5 percent in 2023 from 14.3 percent in 2022, amid well-publicized layoffs and space cutbacks. Of the leasing activity from 2020 to 2022, Tech calculated three years 13.8 percent on average. In the three years leading up to the pandemic, no was 12.6 percent.
On the other hand, AI doesn’t have to be the sole province of startups or AI-dominated companies. McWilliams noted that tech companies like Google and Microsoft are also exploring ways to apply AI to their offerings.
“It’s really hard to predict what they’re going to do in the future,” he said. “We can look at the information that we have, which is relatively short-term, based on the tenants in the market. Anything beyond that, I can’t speak to.
And then there is the question of where this is all leading, will AI become a monster. If it falls into the wrong hands, it can do great harm. Already, according to The New York TimesPioneering AI scientist Jeffrey Hinton—in a move reminiscent of J. Robert Oppenheimer, who turned against nuclear weapons after pioneering the science of making the atomic bomb—quit his job at Google, saying, “Seeing Hard to figure out how you can prevent bad actors from using it for bad things.
Some governments around the world, including in the US, are trying to set parameters for the use of AI, in hopes that Hinton warned.
“We are like everyone else – watching closely,” said a C&W spokesman.