AI Means Bay Area Still Dominates Tech-Related VC Funding

Companies in the San Francisco Bay Area receive the biggest share of venture capital funding in the United States, with an uptick in funds going to AI companies, a potential bright spot for a region with historically high vacancy rates for its commercial office market.

“VC funding is a leading indicator for the real estate market,” CBRE Tech Insights Center Executive Director Colin Yasukochi said. “These companies are getting funded for growth, they’re hiring more people and creating real estate demand.”

During the first half of 2023, the Bay Area garnered $22.7B of venture capital funding, accounting for approximately 40% of the total nationwide, according to CBRE. The Bay Area has struggled with a flailing office market but also saw four different AI firms scoop up approximately 133K SF in office space in the past two months. 

One-quarter of that funding was infused into industries working on artificial intelligence, helping an overall tech sector beset by slow growth and layoffs at the end of 2022 into the first few months of 2023. 

“There’s still a lot of money out there being given to companies,” Yasukochi said. “AI is one of the hot sectors that is getting a disproportionate share of it.”

Within the Bay Area, AI’s total share of VC funding grew to 25% in the first half of 2023 from 21% in the first half of 2022. 

The Bay Area accounted for approximately half of all VC funding geared toward AI in the United States, with $2.85B in the first half of 2023, while capturing about $9B or 40% of all venture capital funding in general. Of that $9B, 82% of that, or $7.2B, was dedicated to tech funding across 237 deals.

The Bay Area also saw an increase in venture capital funding for life sciences in the first half of 2023, although it has cooled a little since the heady days of the pandemic. Nevertheless, life sciences was the second-highest grossing industry in terms of VC funding as investment grew by 13% quarter-over-quarter to $1.2B in the Bay Area. 

The new infusion of funds into AI companies is also having a positive impact on the sagging office sector in San Francisco and the rest of the Bay Area, according to CBRE. 

“There are probably about 10 companies looking for significant space in our market,” Yasukochi said. “I would say they are looking for a total of about 100K SF, which represents a doubling of what they currently have.”

CBRE does not expect these leases to have an immediate impact on historically high vacancy rates, which are over 30%, as other tech companies continue to shed office space. 

“There’s still a lot of other companies that are not related to AI, some of which are not even related to the tech sector, that may still be downsizing their office portfolios,” Yasukochi said. 

However, long-term, the burgeoning AI industry bodes well for the Bay Area, despite technology companies being more likely to embrace hybrid work models. 

“Working together is necessary for the innovation process,” Yasukochi said. “Even more so for AI when you’re dealing with something that’s rapidly evolving.”

It’s still unlikely office workers will be in the office five days a week. But CBRE thinks that companies will have to secure office space that can accommodate their employees at peak times during the workweek, typically Tuesdays and Wednesdays. 

“It’s not the same as it was pre-pandemic, when you needed 150 SF for every employee,” Yasukochi said. “I don’t know what that number is today, but it’s less than that. But if you have 100% or 90% of your people coming in on Tuesday, you are going to need space for them.”

Many of them may work in meeting rooms, which reduces some demand for office space, but the Bay Area’s central role in the technology industry in general and AI in particular could return the demand for certain kinds of office space down the road.

"San Francisco is the primary hub of AI companies due to its proximity to STEM talent from UC Berkeley and Stanford, as well as neighboring tech companies,” JLL Senior Research Analyst Chris Pham said. “The growth of AI has accelerated since OpenAI’s ChatGPT was released in November 2022, with S.F.-based companies receiving significant venture funding despite headwinds in the venture capital markets.”