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Ten years ago, when Uber was growing rapidly, the company decided to signal its commitment to San Francisco by building a giant glass campus on the city's east waterfront.
Then, as the pandemic hit and the shift to remote work increased in 2020, ride-sharing app companies became cash cows, realizing they didn't need as much space and were putting most of it into the market. I did.
Much of the campus has remained vacant for years, but late last year OpenAI, which received a commitment from Microsoft to receive a $13 billion investment, agreed to sublease two of the four buildings on campus. did.
The story is a perfect example of San Francisco's volatile relationship with tech companies in recent years. Uber is one of many tech companies, including Airbnb, Block, Dropbox and Meta, to downsize their San Francisco office space in response to the pandemic.
This outflow of employees has continued into this year. Google closed one of its offices in downtown's Spear Tower last month. Meanwhile, Salesforce, the city's largest private employer and owner of the city's tallest skyscraper, announced it would reduce its office space by 45% and continue shrinking offices in 2024. Other companies are also taking more extreme measures. Billionaire Elon Musk's X stopped paying rent shortly after he bought its San Francisco headquarters in 2022, but the company's legal team says it has been paying some rent since then.
The change has pushed the office vacancy rate to a record high of about 32%, according to city officials, but real estate firm CBRE puts the figure closer to 37%. Either way, it's the highest vacancy rate of any major U.S. city. Before the pandemic, the office vacancy rate here was below 5%. San Francisco is experiencing a strong global shift in real estate trends, due in part to the high percentage of technology companies that are actively adopting remote work.
San Francisco's 20 largest tech companies occupied 16 million square feet of office space in 2019, but by the end of last year, that space had halved to 8.3 million square feet, according to CBRE. Effective rents are now $71 per square foot, 30% lower than 2019 levels, according to research from rival real estate group JLL. The amount of office space available for sublease reached a record high of 9 million square feet late last year, but has since fallen to about 8 million square feet, according to JLL.
The AI boom might help. AI startups have boosted demand for office space in San Francisco over the past 12 months. CBRE says OpenAI will take over about 1 million square feet of office space, much of it abandoned by Uber, giving it one of the city's largest office footprints and roughly matching the space currently occupied by Salesforce. Anthropic, backed by Google and others, moved into Slack's former headquarters in March.
While these are positive signals, AI companies are not yet big enough to dramatically change the dynamics of San Francisco's office market. I'm guessing that both OpenAI and Anthropic may need to increase their workforce in the city several times over just to justify the space they recently took over. JLL says it completed 14 leases in San Francisco in the first quarter of this year alone for AI companies, most of which were startups that raised seed capital and opened their first offices. Most 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 rates of homelessness, petty crime, and drug overdose deaths, which have dented 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.
When it comes to AI, there's no question that San Francisco remains a hotspot for the world's top talent. All eyes will be on whether the gravitational pull of AI will be strong enough to drive a new period of high growth for the Bay Area economy.
tabby.kinder@ft.com
