The artificial intelligence story is still in its earliest chapters, but already it has fueled hundreds of billions of dollars of investment to fulfill its promise. Hoping for big returns, venture capitalists are funding companies focused on leveraging AI’s learning and computational prowess to increase productivity, from the relatively simple task of identifying keywords in contracts to the more complex undertaking of operating driverless vehicles.
AI’s evolution is also expected to have a significant impact on commercial real estate. In addition to increased demand for data center and cell tower capacity, experts are also forecasting a reinvigoration of the office market due to a boost in leasing from AI-related companies.
In a trend that mirrors past technology-driven cycles, for example, AI companies are currently gobbling up office space in San Francisco. Given the market’s office vacancy rate of around 35% and continuing tech layoffs, AI’s leasing flurry is being heralded as the start of a recovery that will benefit REITs and other office owners. And as AI companies mature, it is expected that they’ll eventually accelerate leasing activity in the surrounding Bay Area as well as in Seattle, New York, Boston, and other tech-oriented markets to the further gain of REITs.
The growth of mobile technologies that began with the launch of smartphones in 2008 provides an apt blueprint, observers point out. The innovation ignited an explosion of applications from upstart companies like Uber, Twitter, and Airbnb, as well as established brands such as Facebook and ESPN. From 2013 to 2019 alone, that boom fueled 40 million square feet of office leasing outside the Bay Area, says Colin Yasukochi, executive director of CBRE’s Tech Insights Center, a research and advisory group based in San Francisco.
Similarly, the emergence of large language models and machine learning has become the cornerstone for companies that want to build new AI applications for deployment across industries to create more efficiencies in customer service, contract administration, stock trading, and other activities.
“I think AI will be a big generator of jobs, and its biggest impact is going to be on office real estate because these companies are in the office every day of the week,” Yasukochi says. “The AI revolution may not match the mobile app economy, but it could still grow to a very large size.”
AI Lifeline
AI companies currently occupy about 5 million square feet of San Francisco’s 87 million square feet of office inventory. That AI footprint could increase by an additional 10 million to 15 million square feet by 2030, Yasukochi predicts, although other observers more conservatively suggest it could reach around 12 million square feet by then.
In either case, the region is well situated to drive AI’s growth given its proximity to Stanford University, the University of California, Berkley, and other higher learning institutions. The area also boasts an abundance of senior tech professionals coming from other companies or AI labs like Google DeepMind, says Christopher Pham, a senior research analyst with JLL in San Francisco. Nearly halfway into 2025, AI firms have leased around 500,000 square feet in the city after absorbing more than 1 million square feet last year, he notes.
“AI has definitely spurred a lot of optimism among San Francisco landlords,” Pham says . “Most of our growth is coming from AI companies.”
At the moment, AI companies have bifurcated leasing tendencies, observes Robert Sammons, senior director of research and tech research lead with Cushman & Wakefield, which estimated that the Bay Area led the country with 825 AI companies at the end of 2024. Larger and more established firms are typically hunting for class A space, while startups that need flexibility to accommodate growth or a potential acquisition want short commitments in class B space ready for immediate occupation.
“Clearly AI has been a bright spot in the San Francisco economy over the past three years or so,” he says. “The companies certainly have been hiring, and the activity is moving down the peninsula into Silicon Valley.”
Notable AI office deals in San Francisco include OpenAI’s lease of Old Navy’s former 318,000-square-foot headquarters in Mission Bay last fall. That followed its sublease of two Uber headquarters buildings, also in the submarket, a year earlier.
Additionally, Los Angeles-based Kilroy Realty Corp.(NYSE: KRC) recently leased 60,000 square feet at 201 Third Street in San Francisco to Amplitude, a prepackaged software services company that acquired an AI startup in October. The deal represented the REIT’s largest lease in the city since 2019, according to remarks by Kilroy CEO Angela Aman during the company’s first quarter earnings call in early May. In addition to the Amplitude lease, tours in Kilroy’s San Francisco portfolio increased 60% in the first quarter over the prior year, “providing strong visibility on the future pipeline,” she added.
“Office demand in our markets continues to rebound as we benefit from the ongoing solidification of return-to-office mandates, recent meaningful improvements in the health, safety and vibrancy of some our most important submarkets, and materially growing demand from the burgeoning AI industry,” Aman told analysts and shareholders. “San Francisco best represents the intersection of these important trends.”
VC Darling
Venture capital’s continuing appetite for AI companies should translate into steady office demand for the foreseeable future. AI companies captured 71% of the $91.5 billion in U.S. venture investment in the first quarter of 2025, according to Pitchbook and the National Venture Capital Association.
BXP (NYSE: BXP) President Douglas Linde, commenting on AI investment and leasing activity in San Francisco, told analysts during the company’s first quarter earnings call in April that 2024 was a “terrific absorption year for AI companies.” He then added: “We need to see this trend continue. AI is getting a disproportionate share of all venture investing, and more than 65% of it is going to San Francisco-based companies. So the future bodes well.”
As part of an AI leasing ripple effect, law firms, financial services, and professional services looking to expand their AI services are also hunting for space in the Bay Area, Sammons says. And office owners aren’t the only ones benefiting.
Echoing Aman’s comments, Avalon Bay Communities, Inc. (NYSE: AVB) COO Sean Breslin told analysts during the REIT’s earnings call in May that AI job growth, return-to-office mandates, improved safety, and “negligible” new apartment supply in San Francisco were contributing to an increase in housing demand. Together, those trends fueled a roughly 7% increase in asking rents in the first quarter, he noted.
Spreading the Wealth
AI office demand in other markets may be materializing at a slower rate, but it should pick up as later financing rounds foster the growth of Bay Area-based startups, Pham suggests. Some locales with deep tech talent pools have already begun to see more AI tenant activity.
In Seattle, a market that counts Microsoft and the University of Washington’s Paul G. Allen School of Computer Science among its leading AI innovators, Kilroy’s leasing activity in the first quarter included a 34,000-square-foot expansion by AI firm Databricks in its West8 asset. Databricks, based in San Francisco, first leased 9,000 square feet in the building last year.
Aman told analysts that she anticipated a repeat of such scenarios, as AI tenants “are being rational and disciplined as they initially lease space while placing a high priority on landlords who will work with them to accommodate future growth needs.”
Meanwhile, the greater New York City area, with 237 AI companies, boasts the second-highest concentration of such firms behind the Bay Area, Cushman & Wakefield notes. Nevertheless, OpenAI’s entry into the market in October 2024 with a 90,000-square-foot lease in SoHo arguably did more to put the city on the AI map.
But some amount of leasing attributable to AI may be flying under the radar in big office markets, particularly among diversified technology companies that don’t divulge space devoted to AI pursuits, Sammons says. Early this year, for example, IBM inked a nearly 93,000-square-foot expansion at One Madison Avenue, which is owned by New York office landlord SL Green Realty Corp. (NYSE: SLG) The deal increased IBM’s footprint in the asset to just over 362,000 square feet only a few months after it had opened a flagship office in the building. IBM noted that employees at the location would work on enterprise AI technologies, among other endeavors.
In some cases, AI tenants hunting for space are lumped with technology, advertising, media, and information (TAMI) companies. During SL Green’s first quarter earnings call in April, Director of Leasing and Real Property Steven Durels said that the number of TAMI tenants active in the market had doubled from a year earlier.
Further, at the time the REIT was fielding TAMI leasing requests equating to about 250,000 square feet, which was the most TAMI demand it had seen in a couple of years, he reported. Durels said that all prospects were relocations being driven by growth and that SL Green was “seeing an AI name attached to a lot of these tenants.”
If the AI growth trend continues, it’s an observation that very well could become a recurring theme in future office REIT earnings discussions.
#Industrys #Office #Space #Demands #Creating #Strong #Tailwinds #REITs