Real Estate

Can the AI boom stop the tech exodus from San Francisco?


Unlock the Editor’s Digest for free

When Uber was booming a decade ago, it decided to send a signal of its commitment to San Francisco with a mammoth glass-walled campus on the city’s eastern waterfront.

Then came the pandemic and with the shift to greater remote working in 2020, the ride-sharing app company realised it had become a cash sinkhole and it no longer needed as much space, putting a large chunk of it the market.

Much of the campus sat empty for years until OpenAI, flush with a commitment of a $13bn investment from Microsoft, agreed to sublet two of the four buildings in it late last year.

The tale is a prime example of technology companies’ turbulent relationship with San Francisco in recent years. Uber was one in a long line of technology companies to scale back office space in the city in the wake of the pandemic, including the likes of Airbnb, Block, Dropbox and Meta.

The exodus has continued into this year. Google abandoned one of its offices in downtown’s Spear Tower last month, while Salesforce, the city’s largest private employer and occupier of its tallest skyscraper, has reduced its space by 45 per cent and said it will continue office reductions in 2024. Others have taken more extreme measures. Elon Musk’s X stopped paying rent on its San Francisco headquarters soon after the billionaire took it over in 2022 although the company’s legal team has said some rent has been paid since.

The shift has resulted in record office vacancies of around 32 per cent, according to the city’s government — although real estate group CBRE puts this figure at closer to 37 per cent. At either number, this is the highest vacancy rate of any major city in the US. Before the pandemic, office vacancy rates here were below 5 per cent. San Francisco’s high proportion of technology companies — big adopters of remote working — means the city has been experiencing global shifts in real estate trends hard. 

According to CBRE, the 20 largest tech companies in San Francisco occupied 16mn sq ft of office space in 2019 — by the end of last year that had halved to 8.3mn square feet. Research by rival realtor group JLL said effective rents are now 30 per cent below 2019 levels, at $71 per sq ft. The amount of office space available for sublet hit a record 9mn sq ft late last year, JLL said, although this has since dropped to around 8mn sq ft.

The AI boom might help. AI start-ups have increased their demand for office space in San Francisco in the past 12 months. OpenAI has taken on around 1mn sq ft of office space (much of it the offices that Uber abandoned), making it one of the largest office occupiers in the city, according to CBRE, about equivalent to the space now occupied by Salesforce. Anthropic, whose backers include Google, moved into Slack’s old headquarters in March.

While these are positive signals, the AI companies are not large enough yet to dramatically alter the dynamics of the San Francisco office market. I estimate both OpenAI and Anthropic might need to grow their workforce in the city by multiple times just to justify the space they have recently taken over. JLL says it has completed 14 leases for AI firms in San Francisco in the first quarter of this year alone, but most were fledgling companies opening their first offices funded by seed capital — the majority of these start-ups will fail.

There are non-AI bright spots. The high office vacancy rate appears to have stabilised for now, in part thanks to a levelling off in interest rate rises. Dutch fintech firm Adyen signed the biggest sublease of the year in March, taking over the old Pinterest headquarters. Software platform Rippling also took over nine storeys downtown in April.

But these are the anomalies. The city’s government is already feeling the drop in revenues from sales and business taxes, from fewer people shopping downtown and the reduction in rents.

San Francisco has the highest business taxes in the Bay Area for large companies, as well as burdensome regulations, a high rate of personal income tax, expensive housing and high living costs. On top of that, the city is grappling with social issues like high homeless rates, petty crime and drug overdose deaths that have not helped its reputation as a friendly place to open a business in recent years. For cost-cutting, remote working Big Tech, the reasons to stay have dwindled. 

For AI, San Francisco is still the undisputed home of the world’s top talent. All eyes will be watching whether AI gravitational force is strong enough to fuel a new high growth period for the Bay Area economy.

tabby.kinder@ft.com



READ SOURCE

This website uses cookies. By continuing to use this site, you accept our use of cookies.