OpenAI Announces Nearly 500,000 Square Foot Office Lease In San Francisco

The largest office leasing in San Francisco since 2018 was finalized on Tuesday as OpenAI, one of the largest artificial intelligence companies in the world, moved into two buildings at San Francisco’s Mission Bay Headquarters comprising of nearly 500,000 square feet of office space.

Before the COVID-19 pandemic, San Francisco had a near 100% office occupation rate throughout the city, thanks in large part to the continuing tech boom and a steady demand for office space. However, with the pandemic, many companies began breaking leases to save money, while others embraced stay-at-home work and declined to continue using office space. Even after restrictions were dropped in 2021 and 2022, more companies switched to a work-from-home model or allowed more work-from-home positions, keeping many companies from returning to offices. In addition, high crime rates as well as a growing number of lease expirations by non-returning companies helped keep vacancy rates well above 20%.

In 2022 however, another major factor spiked vacancy rates yet again. Mass layoffs in the tech industry, which began in earnest in October 2022, quickly wiped out the need for large office complexes and long-term leases. Fueled by economic uncertainty, high inflation, rising insurance costs, more people working from home, the rise of AI and automation, the continued rise of e-commerce, and many companies overcompensating, many large companies shed thousands of employees overnight. Tens of thousands of cuts came from longtime Silicon Valley stalwarts Google, Amazon, Intel, Lyft, Yahoo, Meta and Salesforce, with the second quarter of 2023 even producing many corporate, non-tech layoffs for companies in the city as well.

As a result, the average office vacancy rate in San Francisco jumped from 19% in 2021 to 27% in 2022 to 29.4% in the first quarter of 2023. In the second quarter of 2023, it rose to 31.8%, while in the most recent quarter it has gone even higher to 34.7%. While San Francisco Mayor London Breed and city leaders have been scrambling and doing anything to keep businesses at offices downtown, including converting office buildings into housing and improving safety and cleanliness, none of it stuck. Many instead just opted to wait and rely once again on tech firms, led by emerging AI tech and new startups, to set up in San Francisco once again.

AI company emergence in San Francisco

Their patience has paid off in recent months. In September, AI company Anthropic leased 230,000 square feet in the former headquarters of Slack at 500 Howard Street. Many AI-related start-ups have also began leasing smaller office spaces around the city. But on Tuesday, San Francisco received it’s largest leasing contract since the heyday of the tech boom in 2018 when Facebook leased 755,900 square feet of office space in Park Tower at 250 Howard Street. It was OpenAI, one of the largest AI companies on the planet, who officially leased nearly 500,000 square feet of space, effectively taking over two buildings of the Uber Headquarters complex at 1455 Third Street and 1515 Third Street.

“We are glad that in a competitive office real estate market, our employee-friendly, award-winning and sustainable buildings clearly stood out,” said Uber on Tuesday. “By right-sizing our space needs we can bring our teams closer together, exercise rigorous cost management, and bring more foot traffic to the businesses of Mission Bay. This is a win-win-win.

“Uber will continue to occupy the two other buildings on its campus at 1655 and 1725 Third Street. The company will shift its focus to expanding its other campus in Silicon Valley. The remaining buildings contain more than enough capacity for current Uber employees in San Francisco, with sufficient room to grow, and we also plan to also expand our Sunnyvale campus.”

OpenAI also noted their quickly growing company on Tuesday, saying that, right now, they only have a 40,000 square feet office at 3180 18th Street and a 100,000 square feet office at 575 Florida Street in the Mission District.

“We are leasing two buildings from Uber in Mission Bay, which will provide the space needed for our growing team,” said OpenAI spokeswoman Hannah Wong. “We’re thrilled to continue scaling our company in San Francisco.”

City leaders, who have been fighting to get more companies to move back into offices for years and have been doing everything to avoid the vacancy rate reaching 35% in the fourth quarter of 2023, praised the deal as well.

“OpenAI is at the forefront of an industry that is transforming the world, and I am proud they are expanding right here in San Francisco where they first started,” added Mayor Breed in a statement. “This major investment and commitment to our city sends a message that this city is the place to be if you want to be a part of what’s next.”

However, experts told the Globe on Tuesday that San Francisco would need more than AI companies to reverse the tide of vacancies at this point.

“It’s obviously good for the city that such big companies are moving in,” said Michelle Duggan, a building occupancy researcher. “But San Francisco needs way more than that. We need to see a turnaround from firms and companies moving to a work from home model to really see a difference. And in San Francisco, where commutes can be really tough no matter which method you use, they need to really entice people to want to commute if they set up offices.

“Getting these AI companies to set up shop there is fantastic, just as it was getting general computer companies there in the 80s, .com companies there in the 90s, social media there in the 2000s, and apps there in the 2010s. This is the new thing. They largely lost out on cryptocurrencies, so snagging AI companies is a good start. But they need to not only bring a lot more companies in, but also get them to stay in the city.

“In short, AI companies like OpenAI did put a dent into the office losses in the city, but that likely won’t be enough to swing the tide. The city needs to do way more.”

More major AI company leases in San Francisco are expected to be announced soon.