In a city that has struggled more than most to rebound from the pandemic, the artificial intelligence gold rush is giving leaders here a rare sense of optimism.
Venture capitalists have funneled nearly $2 billion in San Francisco-based AI start-ups this year alone, a frenzy of activity that market researchers say could help usher in another tech boom for the beleaguered city, salvage its reputation as the epicenter of innovation — and finally get more people back to the office.
The mayor recently declared San Francisco the “AI capital of the world,” and she has also proposed a number of incentives to attract such businesses, including a tax break for companies that move here.
“There is an undercurrent happening,” said Rebecca Prozan, the board chair of sf.citi, a tech trade organization in San Francisco. “Where that gets to the office market, I don’t think we can fortune-tell that, but there is potential. San Francisco has always been the capital of tech innovation, and we need to continue to attract the new start-up economy.”
The excitement around what AI could do for San Francisco stands in sharp contrast to the doom-and-gloom narrative that has come to define the city — much of it undeniable. Boarded-up storefronts are a common sight in downtown Union Square, once a ritzy and bustling area for tourists. Office vacancy rates hover around 30 percent, yet commercial and residential rents are still some of the highest in the country. Meanwhile, homelessness remains a stubborn and tragic issue, with city leaders struggling to address it.
And overall, the tech industry — on which the city remains heavily reliant — has been languishing, as tens of thousands of workers are laid off and companies including Airbnb, Meta, and Salesforce look to shed office space. Other tech founders have left for cheaper cities with less of a tax burden and lower rents, such as Miami and Austin.
Even outside of tech, the city has seen an exodus of retail from downtown. Big names like Walgreens, Old Navy, and Nordstrom have closed — or plan to close — their locations in downtown San Francisco, citing dwindling foot traffic and deteriorating street conditions related to the city’s homelessness crisis. This week, Westfield announced that it will stop paying the mortgage on its downtown San Francisco mall and that it plans to hand the property back to lenders.
While it’s unclear how long the AI hype cycle will last, the industry represents a “source of growth” that San Francisco desperately needs, said Colin Yasukochi, executive director of real estate brokerage CBRE’s Tech Insights Center.
“The hope and promise of AI is that it creates the next big ecosystem in which companies that might not be purely AI could benefit off that technology and grow,” he said. “And with San Francisco being at the center of it, it does present a possible bright spot in terms of new growth in the future.”
Helping spark the boom is OpenAI, the company that released ChatGPT in November. The company, which is headquartered in San Francisco’s Mission District, helped pioneer its chatbot with generative AI, which uses complex algorithms trained on trillions of words and images from the open internet to produce text, images, and audio.
Since 2019, there have been more than 500 venture capital deals among AI companies in San Francisco, amounting to a total of $17.7 billion in funding, according to CBRE. As those hundreds of companies grow, many founders are starting to look for office space so they can collaborate in person and have a space to bring in potential new clients.
Mike Sample, a managing director at commercial real estate company JLL, said his firm has experienced the most activity related to office searches since vaccines became available in 2021. He estimates that 30 percent of the interest in new leases is coming from AI companies alone, ranging from young start-ups to more mature companies.
“I feel confident in saying that AI will usher in another tech boom in San Francisco,” he said. “The best talent for AI development is in San Francisco, hands down. The question is how can you get more of the right talent, and how can you scale it?”
To draw more talent to the city, Mayor London Breed has proposed a tax break to lure companies who are willing to sign a three-year lease. That proposal — which applies to businesses in information and technical services, among others — is set to go before the San Francisco Board of Supervisors later this month, where it will need six votes to pass.
Breed, who has faced national criticism over the city’s woes, is hopeful that AI can help turn a new chapter in San Francisco, which has had one of the slowest pandemic recoveries of any major city.
In a statement, she said that the future of AI is happening right now in San Francisco and that “this is our opportunity to once again take the lead in what’s next.”
Of the top 20 AI companies by dollars raised, 16 are in the Bay Area and 11 are in San Francisco, according to San Francisco’s Office of Economic and Workforce Development. The San Francisco-based companies have together raised $15.7 billion and employ an estimated 3,400 people, the office said. Along with OpenAI, other companies in San Francisco include Anthropic, Scale AI, and Dialpad.
Sample, the JLL researcher, said much of the leasing interest from AI companies have been in San Francisco’s neighborhoods — such as the Mission District, West Soma, and Potrero Hill. That won’t fix downtown, which has the highest concentrations of vacancies.
Regardless of where they are located in San Francisco, entrepreneurs like Avni Patel Thompson, the co-founder, and CEO of AI company Milo, say just being in the city is key for the “serendipity” of meeting others in the field and being around such a high concentration of talent.
She recently leased space in the Mission District and is planning to look at space downtown as her company continues to grow. She said she has been lured into San Francisco’s “gravitational pull.”
“I feel the energy on the ground in a way that I haven’t felt for lots of years,” she said. “It’s impossible to turn a blind eye to the problems (in San Francisco), but I’m optimistic that we can find the right way to go about it and improve the conditions for everyone — and not just for those who work in AI.”