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San Francisco landlords pin their hopes on AI companies

On Behalf of | Dec 20, 2023 | Real Estate Law

Commercial real estate markets in California and around the country have been struggling to cope with a work-from-home trend that gained momentum during the pandemic when travel restrictions emptied office buildings, and commercial landlords in the Bay Area have been hit particularly hard. Almost 40 retail stores in San Francisco’s upscale Union Square neighborhood have closed their doors permanently since 2020, and the company that operates the Westfield Mall has surrendered the once-valuable property to its creditors. However, some analysts believe that the explosive growth of artificial intelligence technology could provide Bay Area commercial landlords with a respite.

Technology epicenters

Cities like San Francisco, San Jose, Menlo Park, Palo Alto and Mountain View have long been technology epicenters. The area that became known as Silicon Valley once attracted tech startups like Apple, Google, Cisco and Adobe, and it is still considered the best place to find workers with skills in emerging fields like AI. This is why OpenAI chose to place its headquarters in San Francisco in 2015, and it is why at least 10 other AI companies are said to be looking for office space in the city.

A long road ahead

San Francisco mayor London Breed says that she wants to make the city the world’s AI capital, and she has proposed converting unused Union Square retail space into offices. Her enthusiasm is not shared by some commercial realtors who believe that AI companies are not numerous enough and do not employ enough people to replace all of the city’s former office workers. Office vacancies in San Francisco recently climbed to levels last seen three decades ago, and one of the city’s most prestigious office building sold in 2020 for about a quarter of its original asking price.

Economic trends

The commercial real estate market has always followed economic and demographic trends. Shopping malls and entertainment complexes were built when city residents flocked to suburban communities, and supertall skyscrapers were erected to meet the need for prestigious office spaces. The popularity and economic benefits of work-from-home arrangements have tempered the need for commercial real estate in recent years, but the demand for office space in some cities is being buoyed by emerging industries. In San Francisco, AI is the developing field that commercial landlords are pinning their hopes on.