Despite San Francisco's AI industry growth, office vacancies continue to rise, hitting a new record.

• In the second quarter, San Francisco office vacancies reached a new record, while rent prices dropped to their lowest point since 2015, as per Cushman & Wakefield.
• The artificial intelligence boom is benefiting San Francisco, with major leases signed by OpenAI, Anthropic, and Scale AI in the past year.
• The rise in vacancies is due to the trend toward hybrid work and the mass layoffs in the industry.

Although artificial intelligence has benefited San Francisco real estate, it hasn't been enough to counteract the broader market struggle.

In the second quarter, the vacancy rate for San Francisco office space hit a new high of 34.5%, according to a report from Cushman & Wakefield. This is an increase from 33.9% in the first quarter, 28.1% in the same period last year, and 5% prior to the pandemic.

Since late 2015, the average asking rent per square foot has been the lowest, dropping to $68.27 in the most recent quarter, from $72.90 the previous year and a peak of $84.70 in 2020.

The tech industry in San Francisco is facing two challenges: returning employees to the office after the pandemic and a slowdown in the market that has resulted in mass job cuts. Since the beginning of 2022, over 530,000 employees have been laid off by tech companies, including , , , , , and .

The popularity of generative AI and the expansion of fast-growing startups in San Francisco have helped to ease the sting of being late.

In October, OpenAI, the market leader with a private valuation of over $80 billion, announced it was leasing 500,000 square feet of space in the Mission Bay neighborhood, marking the largest office lease in the city since 2018. According to Robert Sammons, senior research director at Cushman & Wakefield, OpenAI is still searching for more space in the city.

In May of this year, Scale AI signed a lease for a reported 170,000 to 180,000 square feet of space in an office building, while Anthropic subleased 230,000 square feet at Slack's headquarters last year.

"While San Francisco is undoubtedly the hub of AI, it won't rescue the commercial real estate market in the city, according to Sammons. Instead, AI will aid the market."

As AI startups secure large leases for new spaces, the trend among tech companies, law offices, and consulting firms is to minimize their footprint when their current leases expire, according to Sammons, who reflects the growing preference for hybrid work.

To attract staffers back, employers are relocating to higher quality space in desirable city parts, where prices have decreased and there are restaurants and shops nearby, Sammons stated.

"Tenants desire to be in prime locations with top-notch amenities, which contributes to the continued success of the best quality trophy space, according to Sammons," he stated.

The financial district and SoMa, two popular business districts in San Francisco, have seen varying levels of vacancy rates. While the vacancy rate in the financial district is still high at 34.2% on the north side and 32.7% on the south side, the vacancy rate in SoMa, which was once a hub for venture-backed startups, has almost reached 50%.

The vacant office space in San Francisco for the quarter was 29.6 million square feet, according to Cushman & Wakefield. Additionally, SoMa has been negatively impacted by both its distance from mass transit options and the departure of large retailers.

While the firm's report indicates that there are positive signs in the market, with absorption expected to improve in the second half and office job numbers stabilizing after a significant decline, Sammons believes there is still room for rents to fall and vacancies to rise. He suggests that uncertainty surrounding the upcoming presidential election may be delaying new leases.

He stated that sometimes tenants delay making decisions during major elections.

WATCH: Commercial real estate vacancies in San Francisco are at an all-time high