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When Uber was experiencing rapid growth a decade ago, it decided to demonstrate its commitment to San Francisco by building a giant glass campus on the company's east waterfront.
Then the pandemic hit and the shift to remote work in 2020 meant ride-sharing app companies found themselves cash hogs, didn't need as much space and put most of it into the market.
Much of the campus had been vacant for years, but late last year OpenAI, which had secured a $13 billion investment commitment from Microsoft, agreed to sublease two of the campus' four buildings.
The story is a prime example of the uneasy relationship between tech companies and San Francisco in recent years. Uber is one of many tech companies, including Airbnb, Block, Dropbox, and Meta, that have downsized their office space in the city in the wake of the pandemic.
The exodus has continued this year. Google closed one of its offices in downtown's Spear Tower last month, while Salesforce, the city's largest private employer and owner of the city's tallest skyscraper, said it was shrinking its office space by 45% and would continue to do so in 2024. Other companies have taken more extreme measures: Billionaire Elon Musk's X stopped paying rent soon after he bought its San Francisco headquarters in 2022, though the company's legal team says it has paid some rent since then.
The shift has pushed office vacancy rates to a record high of about 32%, according to city officials, but real estate group CBRE puts the figure closer to 37%. Either figure puts it the highest of any major U.S. city. Before the pandemic, office vacancy rates here were below 5%. San Francisco's high percentage of technology companies that are actively embracing remote work means the city is strongly experiencing a global shift in real estate trends.
San Francisco's 20 biggest tech companies occupied 16 million square feet of office space in 2019, according to CBRE, but by the end of last year, that space had halved to 8.3 million square feet. Effective rents are now $71 per square foot, 30% lower than 2019 levels, according to research by rival real estate group JLL. The amount of office space available for sublet reached a record 9 million square feet at the end of last year, but has since fallen to about 8 million square feet, according to JLL.
The AI boom could help. AI startups have ramped up demand for office space in San Francisco over the past 12 months. OpenAI has leased about 1 million square feet of office space (much of it in offices closed by Uber), making it one of the city's largest occupants, according to CBRE. That's roughly the same amount of space Salesforce.com currently occupies. Anthropik, which is backed by Google and others, moved into Slack's former headquarters in March.
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While these are positive signs, AI companies are not yet large enough to dramatically change the dynamics of the San Francisco office market. I suspect that both OpenAI and Anthropic may need to increase their employee numbers in the city by several times just to justify their recently acquired space. JLL says it signed leases with 14 AI companies in San Francisco in the first quarter of this year alone, but most of these are seed-funded startups opening their first offices, and the majority of these startups will fail.
There are other bright spots beyond AI. High office vacancy rates appear to be stabilizing for now as rising interest rates have subsided. Dutch fintech company Adyen closed the year's biggest sublease in March, taking over Pinterest's former headquarters building. Software platform Rippling also took over a nine-story downtown building in April.
But these are exceptions: The city government is already feeling the effects of lower sales and business tax revenues, fewer shoppers downtown and falling rents.
San Francisco has the highest business taxes for large companies in the Bay Area, burdensome regulations, high personal income tax rates, expensive housing, and a high cost of living. In addition, the city is grappling with social issues such as high homelessness, petty crime, and drug overdose deaths, which have tarnished its reputation as a startup-friendly place in recent years. Big tech companies looking to cut costs and work remotely have less reason to stay.
There's no doubt that San Francisco remains one of the world's best talent destinations when it comes to AI, and the question remains whether AI's gravitational pull is strong enough to drive a new period of high growth for the Bay Area economy.
tabby.kinder@ft.com
