In its heyday a decade ago, Uber symbolised its dedication to San Francisco by establishing an expansive glass-fronted complex on the city’s eastern waterfront. However, when the pandemic struck and remote working became widespread in 2020, the ride-hailing firm found itself buried in unnecessary costs due to their now-oversized premises. Consequently, a significant portion of the campus was put up for leasing. These premises remained vacant for several years until OpenAI, boosted by a substantial $13 billion (€11.95 billion) pledge from Microsoft, agreed in late 2020 to take on two of the four buildings.
This narrative perfectly illustrates the uncertain relationship San Francisco has had with tech companies in recent years. Uber was just one of the numerous technology firms, including Airbnb, Block, Dropbox, and Meta, to reduce their office space in the city following the pandemic.
The trend has persisted into the current year. Last month, Google vacated one of its downtown offices in Spear Tower, while Salesforce, San Francisco’s top private employer and resident of the city’s tallest building, has downsized its office space by 45 per cent and plans to continue this trend in 2024.
Some firms have opted for even more radical measures. Elon Musk’s company X ceased paying rent for its San Francisco headquarters shortly after Musk took control in 2022, though the company’s legal team has since revealed that some rent has been paid.
This shift has resulted in a record-breaking office vacancy rate of approximately 32 per cent, as cited by the city’s government. However, real estate company CBRE estimates the rate to be closer to 37 per cent. Regardless of the rate, it still stands as the highest amongst major U.S. cities. In comparison, prior to the pandemic, San Francisco’s office vacancy rate was below 5 per cent.
The significant presence of tech companies in San Francisco, who have largely adopted remote working practices, means that the city has been particularly impacted by these global commercial real estate trends.
According to CBRE, the top 20 tech firms in San Francisco had command of a significant 16 million square feet of office premises in 2019. However, this was slashed to nearly half, at 8.3 million square feet, by the closure of last year. Contrasting research from competing property firm JLL indicates that viable rent rates have plunged by a staggering 30% from 2019 figures, currently standing at an average of $71 (roughly €65) per square foot. Late last year recorded an all-time high in available sublet office space at nine million square feet, although this has since dipped to roughly eight million, according to JLL.
The surge in AI start-up businesses may prove beneficial, having demonstrated a notable hike in demand for office space throughout San Francisco over the last year. OpenAI recently secured approximately one million square feet of space (largely comprised of Uber’s former offices), which has rendered it one of the city’s biggest commercial occupants to date, per CBRE. This is roughly on par with Salesforce’s current presence in the city. Furthermore, in March, Anthropic, supported by Google, relocated its headquarters to Slack’s previous location.
Despite these promising signs, the emerging AI firms are yet to reach a size that would significantly influence San Francisco’s commercial property market. Both OpenAI and Anthropic would need to dramatically expand their city-based staff numbers in order to fully utilise the space they have recently acquired. According to JLL, during Q1 this year alone, they overseen 14 lease agreements with AI companies. However, most of these firms are in their infancy, having just opened their first offices with seed funding. However, it is crucial to note that most of these start-ups will not succeed.
There have been a few promising developments outside of the AI sector. For instance, the high vacancy rate within the office property market has managed to stabilise, largely due to the plateau in interest rate increases. In March, Dutch fintech company Adyen inked the largest sublet agreement of the year, acquiring the previous Pinterest head office. Additionally, in April, software platform Rippling took over nine floors in the city centre.
Nevertheless, these are extraordinary circumstances, not the norm. The city administration is already noticing a decline in the income from sales and business taxes, amidst a decrease in city-centre shopping and a reduction in rental rates.
San Francisco, known for bearing the heaviest business taxes in the Bay Area for large-scale businesses, has a reputation for imposing stringent regulations and personal income tax rates, which are quite high. Additionally, the city has steep living and housing expenses. As if those were not enough deterrents, the sociopolitical climate, marred by considerable homeless populations, minor criminal offences, and an alarming rate of deaths due to drug overdoses, has marred its image as a viable business hub in recent years.
In the light of these conditions, the telecommuting giants of the tech industry, who are always on the lookout for cost effective solutions, are finding fewer reasons to remain in the city.
However, without a doubt, San Francisco still leads as the global hub for Artificial Intelligence (AI) talent. The question that now arises is whether the unassailable pull of AI talent will be potent enough to reignite the high-growth phase for the Bay Area economy that once flourished.
– Owned by The Financial Times Limited 2024.