AI won't save San Francisco's landlords, realtors say
Silicon Valley is enjoying a new lease of life thanks to the rise of artificial intelligence, but new data shows that it isn't helping much to curb the decline in vacant commercial real estate.
According to a new report from Cushman & Wakefield, more than a third (34.5%) of office space in San Francisco lay empty in the second quarter of 2024. That's compared with 28.1% a year ago.
To put these figures into context, just 5% of square footage for the city's businesses was up for grabs before Covid upended the way we work.
The record rise in vacancy rates has fed through into a dramatic re-evaluation of asking prices, with the typical rent demanded plummeting to $68.27 per square foot.
That's the lowest rate in almost 10 years and a precipitous decline from the all-time highs of $84.70 seen pre-pandemic.
Although AI firms are booming, it's a challenging time for the rest of tech companies, including established tech giants. Layoffs.fyi estimates that 106,630 people in 362 firms have lost their jobs so far in 2024.
In a bright spot for the San Francisco housing market, there has been a concerted effort to lure remote workers back into the office, at least on a part-time basis.
That sends the message that tech firms aren't willing to relinquish offices entirely—at least not just yet.
As another positive development, OpenAI inked a deal to lease roughly 500,000 square feet of office space last October. An agreement of that size hasn't been seen in the city for the best part of six years.
On the other hand, many AI firms are snapping up space from other tech companies looking to dial their presence down—with tech giant Slack now shacking up with Anthropic, and Scale AI moving into Airbnb's building.
Shifting trends
An overarching theme of the city's commercial real estate market is migration to the most sought-after neighborhoods as an extra incentive to lure employees back into the office.
"The best quality trophy space continues to perform well, because tenants want to be in the best locations with the best amenities around them," said Robert Sammons, Cushman & Wakefield's senior research director.
While commercial real estate is cooling, residential properties remain in high demand—showing suprising resilience to record home prices and multi-decade-high mortgage rates.
Redfin research suggests that the typical home in this city receives an average of four offers and ends up selling in just 22 days, compared with 28 this time last year.
By contrast, this nationwide average stands at 32 days, indicating there's still feverish activity in the home of tech. On top of all this, SF listings, on average, go for 8% above the listing price.
Median sale prices here also stand at a cool $1.44 million, which is more than triple the nationwide median of $438,483. It's no wonder that San Francisco remains one of the least affordable places to buy a home.
While commercial real estate is cooling, residential properties remain in high demand—seemingly inoculated from the bubble of surging interest rates.