How AI Firms Are Reviving Office Space Demand

November 6, 2024

Brokerage Featured News OfficeMoreSan Francisco West

Brookfield Properties’ latest deal in San Francisco underscores an emerging trend.

Notion is the latest AI technology firm to lease office space for its new headquarters in San Francisco. The deal includes 105,000 square feet across five floors within Brookfield Properties’ Monadnock Building at 685 Market St., multiple media outlets reported.

The Monadnock Building is a historic office building in San Francisco. — AI startup Notion has leased 105,000 square feet at Brookfield Properties’ Monadnock Building in San Francisco. *Image courtesy of CommercialEdge*

The space had been occupied by Uber, which put it up for sublease in 2019, according to the San Francisco Chronicle. The new agreement has a 10-year term, with options for Notion to lease additional space in the building.

The U.S. is a global leader in AI and currently hosts 65 of the top 100 globally ranked AI company headquarters, Robert Martinek, director at EisnerAmper, told Commercial Property Executive.

“Demand for artificial intelligence has exploded over the past 18 months,” Martinek said. “We can point to Nvidia and Open AI, two of the fastest-growing companies in the world over the past year.” A January brokerage Cushman & Wakefield report found that AI-related tenants were looking for more than 1.5 million square feet of office space in New York City alone.

“During the past few months, we have seen large leases to AI2 in Seattle, Scale AI in San Francisco and OpenAI in New York City. New AI companies are developing and deploying AI-powered apps, which should only increase leasing activity in the future,” Martinek added.

OpenAI, Scale AI and Anthropic have recently leased in San Francisco, which had a 37 percent vacancy rate earlier this year.

AI firms drive San Fran office leasing activity

The San Francisco market has now exceeded 1 million square feet in AI office leasing volume for the second consecutive year, Alexander Quinn, JLL’s senior director of research, told CPE.

Leasing activity from January to September is up 40 percent compared to last year, driven largely by demand from lease expiration tenants and AI companies, JLL’s third-quarter research showed.

Asking rents remain mostly unchanged, while net effective rents have fallen to $68, marking a 33 percent drop from the fourth quarter of 2019. Trophy assets have been more resilient, declining by approximately 15 percent over the same period.

“A key trend driving San Francisco’s outlook is its strong economic fundamentals,” Quinn said. “For example, VC funding here—which fuels firms like Notion and so many more—is the highest in the nation through the end of the third quarter at $21.7 billion (per Pitchbook Data).”

CommercialEdge data from August showed an upturn in developers’ San Francisco office projects after a recent downturn had whacked office prices. The pipeline has now become one of the largest in the nation.