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AI Firms Drive San Francisco’s Office Leasing Activity As Vultures Swoop In

Eyes are turning back to San Francisco offices. Leasing has picked back up, largely driven by AI companies, and more opportunistic investors have entered the market in recent months to buy assets at steep discounts.

AI companies are responsible for 25% of the 1.6M SF of leases, renewals and subleases closed in San Francisco thus far in Q2, making it the second-best quarter for leasing in the past two years, according to CBRE. This trend has attracted both local and out-of-state capital to the Financial District, SoMa and Mid-Market. 

“AI companies are in the office four or five days a week, 12 hours a day, innovating,” Colin Yasukochi, executive director of CBRE's Tech Insights Center, told Bisnow. “It feels like earlier tech boom days. AI firms are in the office creating the next boom.”

Downtown San Francisco's office vacancy rate has increased to 37% in spite of strengthening AI leasing activity.

With a few days left in the quarter, Scale AI signed the largest transaction in Q2 for more than 178K SF of sublease space at 650 Townsend St.

Meanwhile, growing tenant demand and shifting market dynamics have drawn opportunistic investors back to San Francisco. CBRE reported that 23 properties totaling 2.8M SF and $1.1B in value have been sold, are under contract or are on the market in the second quarter.

“If all sell, this would be the highest number of properties sold since 2019 and highest square feet and dollar volume since 2021,” CBRE said.

While local players have been acquiring inexpensive office buildings for the past six to nine months, out-of-state investors are now also eager to cash in on these low prices.

Buildings are locking in 50% to 70% discounts from their pre-pandemic price tags, and downtown San Francisco office buildings are trading for $200 to $300 per SF, Yasukochi said. 

“We haven’t seen prices at this level since the dot-com bust,” he said. 

Distressed sales have been closing because investors believe new AI and tech tenants will continue to sign lease transactions, reviving the office market's fundamentals.

“San Francisco has been one of the leading office markets, and now you can purchase low and sell high,” Yasukochi said. 

Florida-based LNR Partners picked up 995 Market St. in Mid-Market for roughly $72 per SF at auction in April.

But most properties are trading higher, some of which are also being purchased by out-of-state opportunistic investors. One example is the 78K SF 410 Townsend St., which New York Life Real Estate Investors and Bridgeton purchased in mid-April for $280 per SF, or $22M. 

Despite increased leasing activity, vacancies increased slightly to 37% from 36.7% in Q1, while average asking rents declined by 30 cents to about $68 per SF at the end of Q2. Absorption was negative 442K SF in Q2, based on CBRE’s preliminary stats.

The high vacancy rate needs to be addressed for a broader sustainable economic recovery to take hold, according to one of the highest-ranking officials at the Federal Reserve Bank.

During a press conference yesterday at the Commonwealth Club of San Francisco, Federal Reserve Bank of San Francisco President and CEO Mary Daly said that developers and business leaders need to come up with solutions to fill San Francisco’s empty office buildings. 

“For founders and developers and CEOs, bring your people back to work,” Daly said. 

In spite of the city’s short-term struggles in filling office space, Daly said she believes in the resilience of San Francisco’s economy.

“It’s hard for an economist and historian to say that if you’ve got talented people, a beautiful place to live, great infrastructure and an innovative entrepreneurial spirit that you’re going to be held back,” she said. “And I think that’s where San Francisco is.”