The commercial real estate sector has been navigating an existential crisis in the wake of the remote work revolution brought on by the COVID-19 pandemic. However, there is a glimmer of hope on the horizon, and it comes in the form of the booming artificial intelligence (AI) industry. Recent data from a CBRE study reveals that the tech sector has reasserted itself as the leading industry for office leasing growth in 2023, offering a potential lifeline to the struggling commercial real estate market.
According to CBRE’s Tech-30 report, the tech sector’s office leasing activity surged to 16.5 percent of the total market, equivalent to 7.3 million square feet, during the third quarter of 2023. This impressive growth outpaced the finance and insurance industry, which accounted for 15 percent of the market. This resurgence in the tech sector can be attributed to the explosion in AI-related companies, which are increasingly looking to secure office spaces as venture capital and investors pour into the AI space, according to a recent report in Yahoo! Finance.
Colin Yasukochi, executive director of CBRE’s Tech Insights Center, emphasized the significance of physical office spaces in AI, stating, “You need human intelligence to create artificial intelligence. This is such an emerging area that people need to be more together to collaborate and innovate, and that’s ever more important.” Major tech hubs like San Francisco, Silicon Valley, New York, Boston, and Los Angeles witnessed significant growth in office leasing activity by AI companies.
The growth in office leasing activity by AI companies was not limited to major metropolitan areas. Surprisingly, cities like Kansas City, Missouri, and Colorado Springs, Colorado, also experienced increases in demand. Beyond the borders of the United States, Canada continued to witness substantial growth in the tech sector, with cities like Vancouver and Waterloo leading the way.
While the commercial real estate sector still grapples with the impact of remote work, the resurgence of the tech sector, driven in part by AI, offers a glimmer of hope. Some tech giants, including Amazon and Alphabet, have already called their employees back to utilize their extensive office spaces. Roblox recently introduced a return-to-office plan, offering employees the choice to return at least three days a week or opt for a different arrangement.
However, not all tech giants have mandated a return to the office. Microsoft, a leader in AI, continues to operate with a flexible workplace approach, accommodating remote, hybrid, and in-office staff. Despite the increase in leasing activity by tech companies, their share of leased office space remains below its pre-pandemic peak of 22 percent in 2019.
Colin Yasukochi noted that AI, while promising, might not singlehandedly revive the commercial real estate market in the short term. Nevertheless, he believes that AI has the potential to create a platform that will spur new business creation and drive a wave of growth, similar to what was observed after the Great Financial Crisis and the advent of the mobile internet.
The commercial real estate industry faces challenges beyond the impact of remote work. One significant concern is the looming wall of debt, with approximately $1.5 trillion in commercial mortgages coming due by 2025. Owners are exploring options to refinance their debt, but with interest rates remaining higher for an extended period, obtaining favorable terms is becoming increasingly challenging.
As we enter the fourth quarter of 2023, it appears that the commercial real estate industry may experience a divergence in fortunes. Some owners will grapple with distress, while those with ample capital will find great opportunities to deploy their resources. The growth of the AI sector, along with the continued evolution of tech hubs, presents a ray of hope for a beleaguered industry striving to adapt to a rapidly changing landscape.
