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AI companies drive demand for office space in tech hubs, new study finds

Commercial real estate is having an existential crisis, but the boom in artificial intelligence may be providing a bright spot for tech hubs.

New data from a CBRE study first released to Yahoo Finance showed that the tech sector reclaimed the pole position as the top industry for office leasing growth in 2023.

The tech sector’s office leasing activity grew to 16.5% of the total market, or 7.3 million square feet, in the third quarter, according to CBRE’s Tech-30 report. Tech outpaced the finance and insurance industry, which accounted for 15% of the market.

An explosion in AI is helping to draw at least some leasing activity, as venture capital and investors pile into the space. Although AI companies may seem like strange bedfellows with commercial real estate, CBRE found that AI companies are seizing more office space, especially in the San Francisco Bay Area, as they look to grow quickly.

"You need human intelligence to create artificial intelligence," Colin Yasukochi, executive director of CBRE's Tech Insights Center, told Yahoo Finance. "This is such an emerging area that people need to be more together to collaborate and innovate, and that's ever more important."

A view of San Francisco skyline. City pins hopes on AI to bring bodies back to buildings. February 13, 2023.  REUTERS/Carlos Barria
A view of the San Francisco skyline. (Carlos Barria/REUTERS) (Carlos Barria / reuters)

San Francisco, Silicon Valley, New York, Boston, and Los Angeles saw the largest growth in office leasing activity from AI companies, the report found.

But it wasn't just the biggest metro areas that saw an uptick. Kansas City, Mo., and Colorado Springs, Colo., also saw increases. Outside the US, Canada continued to see tech sector growth, with Vancouver and Waterloo among the biggest markets logging growth.

AI's 'wave of growth' could spur office demand

Commercial real estate is still grappling with the hit to office demand from remote work.

Kastle Systems, which tracks office activity with building entry swipes and key fob data, showed that office occupancy in the top 10 metro areas in the US topped 50% this week, a slight increase over the prior week.

Many heavyweights in the tech sector, such as Amazon (AMZN) and Alphabet (GOOG, GOOGL), have called workers back in to make use of their massive office spaces.

Roblox (RBLX) is the latest tech company to institute a return-to-office plan. The gaming platform says it gave workers two options: return to the office at least three days a week or leave.

AI startup office workers stand outside a building for lease.
Piero Molino, Michelle Britton, Will Van Eaton, and Michael Ortega of the AI startup Predibase stand outside the entrance to the company's office space in San Francisco, Calif., on Oct. 18, 2023. (Loren Elliott for The Washington Post via Getty Images) (The Washington Post via Getty Images)

Not all tech giants have created a timeline for mandatory return to office, however. Microsoft (MSFT) — a leader in AI — still operates a flexible workplace, meaning some staff are remote, some are hybrid, and some are in an office full time.

Although the tech sector has increased leasing activity, its share of leased office space is still down from its pre-pandemic peak of 22% in 2019. As AI is still in its early years, the extent to which it drives leasing demand over time remains to be seen.

"Artificial intelligence is probably too small of a sector within tech to really turn around the commercial real estate market quickly," Yasukochi said. "But we feel like they can create a platform that is going to lead to a lot of new business creation and create a wave of growth, similar to what we saw after the Great Financial Crisis and the mobile internet."

Still, the growth in AI could help lift the commercial real estate industry, which faces a wall of debt in addition to the challenge of getting people back in buildings.

A much-talked-about number is $1.5 trillion — the value of commercial mortgages coming due by 2025. One way owners deal with that is by getting a new loan to pay off the debt. But with interest rates remaining higher for longer, banks are choosier about new terms.

We can expect to see "a tale of two cities" in the fourth quarter of this year, Cathy Cunningham, executive editor at Commercial Observer, told Yahoo Finance. On one hand, some owners will face much more distress. On the other hand, those who have "the cash will have great opportunities to deploy capital."

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