San Francisco office demand surged 112% year-over-year in Q3, biggest jump among U.S.

Demand for San Francisco office space more than doubled as venture capital flooded into artificial-intelligence startups last quarter, making it the hottest market in the U.S. for office space, according to real estate software company VTS.

San Francisco office demand in the second quarter was the highest in five years, but third-quarter demand surged to a level that VTS CEO Nick Romito described as “astounding.”

VTS, which tracks companies starting their search for office space, found that San Francisco saw a 112% increase in office demand in the third quarter from a year earlier, and a 60% increase from the second quarter.

“The last three months have been truly exceptional for office demand in San Francisco, in particular, the tech side. This was a capstone quarter,” Max Saia, head of investor research at VTS, told the Business Times. It can take up to nine months for these tenant searches for office space to result in signed leases.

“We obviously had seen good growth rates in the past in San Francisco, but the city was coming off such a low base that it was hard to necessarily make too much of it,” Saia said about the city’s pandemic recovery.

The VTS Office Demand Index, or VODI, tracks office leasing in San Francisco, Seattle, Los Angeles, Chicago, Boston, New York and Washington, D.C. In the third quarter, New York was a distant second behind San Francisco when it comes to growth in office demand, likely reflecting New York’s more diversified economy that limited the impact of tech’s strong showing, Saia said.

“San Francisco is very clearly — and really all of the Bay Area, but San Francisco in particular — is the center of this tech revival being fueled by AI,” Saia said, adding that Seattle is another city getting a lift from tech leasing, but not to the extent San Francisco experienced in the third quarter.

In the months ahead, Saia anticipates San Francisco will see vacancy levels fall and investor interest in the city’s office towers rise amid the robust leasing demand.

VTS reported a lot of demand to lease San Francisco office space of 50,000 square feet or more, as companies raise more money from investors.

“Big check sizes can definitely mean larger office footprints for venture-backed companies,” Saia said. “We’re seeing a lot of that.”

Demand for San Francisco office space also may be getting a lift from AI startups wanting employees to work together in the office to spur innovation, as well as larger employers embracing stricter return-to-office policies.

Looking to the fourth quarter, Saia expects San Francisco office demand will be relatively strong but down from the third quarter, given year-end holidays.

San Francisco’s surge in office demand occurs against a mixed picture elsewhere. Nationally, office demand was up just 16% year-over-year and actually down 4% from the second quarter.

The looming federal shutdown, which went into effect Oct. 1, and economic uncertainty may have spurred some companies to tap the brakes on their office-leasing plans.

“A robust annual increase amid quarterly stagnation demonstrates that near-term momentum in the office market is stalling,” a VTS spokesperson said of the company’s national findings. “San Francisco was the clear standout.”