Cold And Hard Truth: The Grim REALITY Behind San Francisco’s AI Boom

By Lisa Pelgin | Wednesday, 10 July 2024 12:00 PM
Views 1.3K
Image Credit : Beehiiv.com

Despite the thriving artificial intelligence industry that has significantly bolstered the stocks of major tech giants in Silicon Valley, San Francisco is grappling with a record-high office vacancy rate.

A recent report reveals that over one-third of the city's offices remain unoccupied.

According to The New York Post, real estate firm Cushman & Wakefield has discovered that the office vacancy rate in San Francisco has reached an unprecedented 34.5% in the second quarter, a slight increase from the 33.9% recorded in the first quarter. This is a stark contrast to the 5% vacancy rate before the COVID pandemic, and a significant rise from the 28.1% recorded in the second quarter of last year.

Despite the city's concerted efforts to attract tech workers who relocated during the pandemic to areas with lower living costs, reduced taxes, and fewer crime incidents, the office space situation remains bleak. The current state of affairs has compelled landlords to reduce rent prices to their lowest in nearly a decade. The average rent in the second quarter dropped to $68.27 per square foot, a significant decrease from the pre-pandemic rate of $84.70 per square foot.

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Earlier this year, commercial real estate firm CBRE projected that it could take years for San Francisco's office market to fully recuperate. While the total vacancy rate continues to rise, the rate of increase has somewhat decelerated.

Despite these challenges, San Francisco's downtown has managed to attract artificial intelligence startups. Last year, Anthropic, an Amazon-backed rival to ChatGPT maker OpenAI, subleased 230,000 square feet of office space previously occupied by Slack. OpenAI, the world's most valuable AI company, announced last fall that it would be leasing around 500,000 square feet of office space in the city's Mission Bay area. In May, Scale AI signed a lease to move into Airbnb’s office building, occupying around 180,000 square feet of space.

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However, these AI firms' confidence in San Francisco has not been enough to rescue the city's commercial real estate sector from its current predicament. "San Francisco is certainly the center of AI, but AI is not going to save the San Francisco commercial real estate market," Robert Sammons, senior research director at Cushman & Wakefield, told CNBC. "It will help."

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The Bay Area has long been the epicenter for tech companies in the country. However, the pandemic has marked a turning point for the city. Since 2020, at least 53 companies, including high-profile firms like Tesla, McAfee, Oracle, Hewlett Packard, and Palantir, have relocated their headquarters out of San Francisco and the Bay Area. The shift to remote and hybrid work schedules has also led several other tech companies, including Meta, PayPal, Alphabet, Slack, and Salesforce, to reduce their office footprint in the city.

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The city has also witnessed the closure of several popular retail brands, including Nordstrom, Whole Foods, Old Navy, and the Westfield San Francisco Centre shopping mall. This series of events underscores the profound impact of the pandemic on San Francisco's commercial real estate sector and the broader implications for the city's economic landscape.

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