San Francisco’s AI-Driven Revival: A New Gold Rush or a Mirage?
In September 2023, Marc Benioff, CEO of Salesforce, proclaimed San Francisco’s AI-fueled comeback “another truly amazing gold rush!” This sentiment followed a report that demand for new office space in the city neared 1 million square feet. By early 2024, The Economist declared that “San Francisco staged a surprising comeback.” It seemed like a dramatic turnaround for a city that had faced numerous predictions of its decline since the pandemic. But is this revival as robust as it appears?
The Pandemic Exodus and Urban Doom Loop
The pandemic caused a significant exodus of workers and companies from San Francisco. Notable venture capitalists relocated to Miami, and major tech companies like Meta announced permanent remote work policies. This led to reduced demand for office space, contributing to the “urban doom loop” hypothesis: as demand for office space drops, commercial real estate values fall, leading to lower city revenues and services, which further drives businesses and workers away.
The AI Boom: A Glimmer of Hope
In November 2022, the launch of OpenAI’s ChatGPT sparked a new technology boom. In 2023 alone, investors poured nearly $30 billion into AI start-ups, many based in San Francisco. Economic conditions improved nationwide, defying predictions of an inevitable recession. By early 2024, the S&P 500 hit an all-time high, unemployment remained low, and tech stocks soared.
This tech-driven economic revival led to a reversal in San Francisco’s net migration from negative to positive. However, this resurgence in economic activity didn’t translate into a corresponding demand for office space.
The Persistent Vacancy Crisis
Despite the economic boom, the national office vacancy rate reached 20 per cent in early 2024, a record high. In San Francisco, over a third of all office space remained vacant. Salesforce, despite Benioff’s optimism, further reduced its office footprint by 700,000 square feet shortly after his celebratory post.
The Remote Work Revolution
The rise of remote work is the primary reason for persistently high vacancy rates. More than a quarter of all paid workdays are now performed from home, as per a survey by Stanford economics professor Nicholas Bloom and others.Companies continue to reduce their office space as leases come up for renewal, a trend likely to persist.
Implications for Urban Planning
City leaders must acknowledge that pre-pandemic office demand is not coming back and plan accordingly. Efforts to diversify tax bases and revitalise urban environments are crucial. Strategies include streamlining the construction of new housing and mixed-use neighbourhoods, enhancing public services, and focusing on what makes urban life attractive beyond just being an employment hub.
The AI Paradox
The AI boom, while boosting the economy, also contributes to the uncertainty in office demand. Advances in AI may reduce the number of office jobs and increase remote collaboration, further decoupling economic activity from office demand. Data from the AI sector shows that companies can achieve significant revenue growth with fewer employees. For instance, in 2003, Google employed around 1,600 people to achieve $1 billion in revenue, whereas OpenAI surpassed this milestone with less than half that number of workers.
Embracing a New Urban Reality
Since the pandemic, stakeholders have grappled with the changing dynamics of office work. The stages of denial, anger, bargaining, and depression have given way to an acceptance of the need for radical change. However, the economic rebound has rekindled denial in some quarters.
For cities to thrive, they must transition to a less office-centric world. This involves diversifying their economic base, investing in housing and mixed-use developments, and enhancing urban amenities. Recognising that the relationship between economic activity and office demand has fundamentally changed is the first step towards building resilient and vibrant urban centres in the post-pandemic era.