AI’s Impact On The Bay Area Could Help Parts Of The Office Market Rebound

Artificial intelligence, while not the savior of San Francisco’s office vacancy problems, will help buoy parts of the market in the Bay Area, experts say.

In the fourth quarter of 2023, Anthropic and OpenAI signed leases for a combined 716K SF of office space, according to Transwestern.

The two companies represent the leaders in the growing AI field of startups racing to corner a part of the burgeoning field. 2024 will likely bring the continued influx of AI companies, albeit signing smaller leases, to the Bay Area and specifically in San Francisco’s downtown core.

“There’s a lot of those tenants still in the market,” Tony Natsis, partner at real estate law firm Allen Matkins, told Bisnow.

The hope is that as the AI industry grows and forms an ecosystem, it will attract other companies to lease space too. 

“That’s a potential positive going forward, but we still have 400K SF of AI tenants looking for space,” Cushman & Wakefield’s Bay Area Senior Director of Research Robert Sammons said. “It’s all expansion and looking to grow here, so it is a case of this development of a sector that didn’t really exist at this scale even two to three years ago.”

And while this will take time, eventually experts expect the top-tier office buildings that currently have vacancies to begin seeing tenant interest in the coming years.

Tenant demand for AI leases is highest in the Bay Area, where companies are leasing nearly 2.5M SF of office space as of 2023 before OpenAI signed their lease, per a recent report from Cushman & Wakefield.

Most AI firms in the country are based in the Bay Area and have grown by some  65% since 2012 in the Silicon Valley and San Francisco markets, the report found.

Part of what makes the Bay Area an AI hub is what makes it a tech hub as well.

“There’s a heck of a lot of money in this city in [venture capital] alone,” Sammons said. “We’re far and above every other market in North America and continue to be even in the downturn.”

Total spending for AI is expected to increase 123% from 2022 to 2025, per Cushman & Wakefield.

OpenAI and Anthropic signed leases outside of the core business district in downtown San Francisco, but the city’s office vacancies are concentrated in the Financial District. With the supply available, experts say some companies will move into the Financial District and gravitate to the top-tier buildings.

Already, AI companies are occupying space in Mission Bay, the Embarcadero and neighborhoods that offer top-tier buildings with amenities, signaling a flight to quality, Natsis said.

This leaves buildings in a middle tier to compete and cater to the will of new tenants, and the ecosystem that forms, or else lose out. Natsis said this tier of Class-A buildings will likely bounce back with AI.

“I think AI will help the middle-tier buildings pretty dramatically,” Natsis said.

AI companies, similar to tech companies desperate to woo workers back to the office, are looking for amenities and the top-tier space they can find for their startups. That makes some buildings downtown competitive while eliminating others completely.

Class-B and C buildings that either aren’t a good fit for conversions or don’t offer the same amenities or neighborhood appeal might be left behind.

Some buildings might work for other uses like educational or cultural spaces, but others might need to be demolished altogether, Sammons said. 

The Financial District will likely become home to some of the new AI companies as they form, however. 

“You will see some of them landing in the central business district,” Sammons said. “I think they are casting a wider net than they were initially.”