Technology
Tuesday, July 9th, 2024 7:58 am EDT
Key Points
- The vacancy rate for San Francisco office space reached a record 34.5% in the second quarter of 2024, with average asking rents dropping to the lowest levels since late 2015.
- The city’s commercial real estate market struggles due to the slow return of workers post-pandemic and significant layoffs in the tech sector, despite the influx of AI companies leasing large office spaces.
- While AI startups have signed major leases, the overall trend is a reduction in office space by tech firms, law offices, and consulting firms, reflecting a shift towards hybrid work models and relocation to higher quality spaces.
San Francisco’s real estate market is facing significant challenges despite the recent surge in demand from AI companies. The city’s office space vacancy rate hit a record 34.5% in the second quarter of 2024, up from 33.9% in the previous quarter and a stark increase from 5% before the pandemic. Average asking rents have also fallen to $68.27 per square foot, the lowest since late 2015. The struggles stem from two main issues: the slow return of workers to offices post-pandemic and a downturn in the tech sector, which has seen over 530,000 layoffs since 2022, including major cuts at Alphabet, Meta, Amazon, Tesla, Microsoft, and Salesforce.
Despite these challenges, the popularity of generative AI has provided some relief. High-growth AI startups like OpenAI, Anthropic, and Scale AI have leased large office spaces in San Francisco. OpenAI, valued at over $80 billion, leased approximately 500,000 square feet in Mission Bay, marking the city’s largest office lease since 2018. Anthropic and Scale AI also secured significant office spaces, indicating a strong presence of AI companies in the city.
However, the influx of AI companies is not sufficient to offset the broader market struggles. Many tech firms, law offices, and consulting firms are reducing their office space as leases expire, reflecting a shift towards hybrid work models. Companies are also relocating to higher-quality spaces in more desirable areas, benefiting from reduced prices and aiming to attract employees back to the office with proximity to amenities.
Top employers like Salesforce, Uber, Visa, and Wells Fargo have implemented partial return-to-office policies, which has provided some stability, particularly in the financial district. Nonetheless, the vacancy rate remains high, with areas like SoMa, known for housing venture-backed startups, experiencing nearly 50% vacancy due to its distance from mass transit and significant retail departures.
In total, San Francisco had 29.6 million square feet of vacant office space in the second quarter. While there are signs of potential improvement in market absorption and stabilization of office job numbers in the latter half of the year, further declines in rent and increases in vacancies are expected. Additionally, uncertainty around the upcoming presidential election may delay new leasing decisions, contributing to the ongoing challenges in the market.
For the full original article on CNBC, please click here: https://www.cnbc.com/2024/07/08/san-franciscos-real-estate-slide-continues-as-office-vacancies-peak.html
