D
emand for large office spaces in San Francisco has reached a post-pandemic high, driven largely by artificial intelligence (AI) companies. According to Avison Young research, AI firms are now responsible for 41% of all space taken in San Francisco's 50,000-plus square foot market since 2023. This trend is expected to continue, with OpenAI, Scale AI, and Adyen being recent examples of large AI companies taking up significant office space.

    The demand for smaller offices has decreased, with leases under 20,000 square feet making up less than 40% of the market in 2024 compared to over 50% in 2023. However, these smaller spaces are still highly sought after, particularly those with premium views and existing build-outs.

    While AI companies dominate the larger lease market, traditional FIRE (finance, insurance, real estate) industries have increased their presence in San Francisco's office market. These industries now make up over 26% of the market, up from 8.8% pre-pandemic. This growth is attributed to their continued investment in the city and potential access to more capital.

    To attract tenants, landlords are offering more concessions, including free rent and reduced tenant improvement allowances. The average length of free rent has increased by 42.9% year-over-year, from seven months to 10 months for a 10-year deal. This trend is expected to continue, with high construction costs and vacancy rates contributing to a slowdown in new development projects.

    Despite the uncertainty surrounding the current trend towards larger leases, Avison Young's Louis Thibault remains optimistic due to increasing demand, interest rate drops, and stricter in-office policies among tech companies.