SF downtown office vacancy rises, but so does demand by AI and tech firms

More than one in three offices now sit vacant in downtown San Francisco, according to CBRE. But demand is at levels not seen since before the pandemic, offering some hope that the end to the office market’s downward spiral may be near.

CBRE monitors demand “through its extensive network” of office landlord and tenant reps in San Francisco, according to Colin Yasukochi, executive director of CBRE’s Tech Insights Center. Its research shows that total demand in the the city reached 5.2 million square feet by the end of the second quarter of 2023, the highest level since the first quarter of 2020, before the pandemic upended the office market with a prolonged shut down, followed by the embrace of work-from-home policies at some of its biggest tech tenants.

But tech, particularly AI, is “leading the renewed growth and is best positioned to absorb big blocks of space in the future,” Yasukochi said via email. Artificial intelligence content moderation company Hive signed one of the biggest deals of the quarter with a nearly 60,000-square-foot sublease at 100 First Street in the Financial District, where total availability is at about 35 percent and negative absorption for the quarter was more than 800,000 square feet.

“Artificial intelligence companies led leasing activity in the third quarter this year and are doubling or tripling their footprint, indicating that they’re planning for growth — a positive sign for the market,” Yasukochi said, adding that San Francisco is the only market in the country that has experienced a significant increase in office space demand from AI companies — about 1 million square feet.

It will take six months to a year for today’s demand to begin to chip away at the record 34 percent office vacancy rate in the city, Yasukochi estimated. In the meantime, those record-breaking numbers will continue to climb. 

Net absorption citywide dropped another 1.85 million square feet in the third quarter. The average asking rent is down to under $72 annually per square foot as more non-trophy buildings find takers among budget-conscious renters. 

Mission Bay continued to lead on direct asking rent at more than  $93 and the SF Giants-Hines Mission Rock project scored a big win in the quarter with Paris-based IT firm Capgemini taking about half of the nearly 60,000 square feet of office space in its newly completed building, The Canyon, for a 10-year term. It’s another example of a tech firm moving out of SoMa, which now has a total availability above  45 percent. 

“Given the high level of supply, it will take many years of strong demand to significantly reduce vacancy,” Yasukochi said. 

Even with all the available inventory, Yasukochi said, “high-quality, well-located buildings near restaurants and retail continue to do well, in addition to plug-and-play spaces that allow companies to move in quickly with minimal improvements needed.”

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