Tech startup Hex is making a significant impact on San Francisco's struggling downtown district as it focuses on data and artificial intelligence. In a move to expand its operations, the company has signed an 8,500-square-foot lease at 330 Jackson Street, just a short walk away from the iconic Transamerica Pyramid office tower.
Finding suitable space in San Francisco has become increasingly challenging for AI companies, according to Hex CEO and co-founder Barry McCardel. He emphasized the importance of a pre-built space that offers a comfortable commute for employees. Fortunately, the downtown area has seen some revival recently, with foot traffic returning to popular tourist spots, cable cars, and ferryboats. Public transit has also seen an uptick as more workers return to their offices and the city puts efforts into ensuring cleaner and safer streets.
Real estate firm Jones Lang LaSalle (JLL), which facilitated Hex's new 2.5-year lease, reveals that there are over 10 AI companies currently searching for approximately 800,000 to 1 million square feet of office space in San Francisco. This demand from AI companies is a positive sign for the city's landlords, who have struggled to occupy their office buildings. In fact, about a quarter of San Francisco's total office requirements, which is approximately 3.9 million square feet, come from AI companies as reported by JLL.
Hillary Hogan from JLL comments on the wave of interest in AI leasing, noting its significance in the commercial real estate landscape. San Francisco's downtown district is in need of such rejuvenation, with office rents and property values declining and prominent landlords surrendering properties to lenders rather than waiting out the storm. Furthermore, low foot traffic has impacted retailers, leading to store closures including Nordstrom Inc.
This latest move by Hex demonstrates the attractiveness of San Francisco to tech companies in the AI industry, breathing new life into the city's downtown district.
Silicon Valley has long held a reputation as the global hub for venture-capital funding and tech companies looking to go public. However, recently there has been a shift in the tech landscape, with San Francisco emerging as a strong contender in attracting AI startups.
The success of AI technologies like ChatGPT has contributed to this shift, with Nvidia Corp's stock soaring to a record high and a market capitalization of $1.2 trillion. Nvidia's corporate offices are based in Santa Clara, Calif., just 45 miles southeast of San Francisco.
In 2022, San Francisco surpassed Silicon Valley in terms of office space dedicated to AI companies, boasting an impressive 2.3 million square feet compared to Silicon Valley's 3.1 million square feet. This growth highlights San Francisco's ability to attract and foster AI innovation.
One factor that sets San Francisco apart is the absence of a "CEO tax," which is applicable in the city if top executives are paid at least 100 times the median salary of a local worker. Silicon Valley, on the other hand, does not impose such a tax.
However, Mayor London Breed is taking steps to incentivize companies to return to San Francisco by including tax breaks for small and medium-sized businesses in the city's $14.6 billion budget. This move aims to reinvigorate the city's business ecosystem and encourage companies to bring their operations back.
When it comes to office rents, San Francisco has slightly higher average rates compared to Silicon Valley. According to JLL, tenants with full-service gross leases can expect to pay around $77 per square foot in San Francisco, while the rate in Silicon Valley is around $72 per square foot.
For companies like Hex, securing a new lease in San Francisco provides an opportunity for their 75-person staff, including remote workers, to collaborate and connect as more people return to the Bay Area following the pandemic. However, the reality is that the workplace will not fully resemble pre-pandemic times, as highlighted by McCardel, a representative from Hex. Despite this, he firmly believes that San Francisco remains the "center of gravity" for AI.
Hex, backed by influential investors Andreesen Horowitz and Sequoia Capital, launched in 2019 and has experienced substantial growth. Last year, the company raised $52 million in Series B funding and also operates a smaller sublet office in New York City.
Tech enthusiasts and industry experts agree that despite the challenges faced by San Francisco's office market, the city's tech scene is far from dead. The continued growth of AI startups and initiatives demonstrates the resilience and enduring appeal of San Francisco as a thriving tech hub.
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