San Francisco's recovering office market is getting another artificial intelligence-induced boost with a startup's deal to more than triple its headquarters space in the city.
Harvey AI, a provider of automation services for the legal industry, has agreed to fill about 92,000 square feet at Kilroy Realty's 201 Third St. building in the city's SoMa neighborhood.
The multi-floor lease was finalized late last month and is scheduled to take effect shortly before the end of the year, according to people with knowledge of the arrangement. The deal comes on the heels of a Series E funding round for the firm totaling $300 million, bringing its valuation to $5 billion, the company told Fortune.
While Harvey representatives declined to comment on details of the lease agreement, a spokesperson confirmed that the fast-growing company will relocate to its new headquarters space this fall. Once realized, the move represents a significant expansion for Harvey in relation to its current corporate hub a few blocks away at 575 Market St., where it has occupied a little more than 30,000 square feet for the past two years.
“While we don’t share lease details or specific hiring targets, the move will support both our San Francisco growth goals and our objective of building a great connected culture across our teams," the spokesperson said, adding that in addition to accommodating the startup's plans to expand its workforce, the new address will provide "a space where we can host Harvey customers.”
The deal with Harvey, earlier reported by the San Francisco Chronicle, marks a significant win for Kilroy Realty, which similar to other landlords in the city has in recent years struggled to rebuild its pre-pandemic occupancy levels.
The city continues to sport one of the nation's highest office vacancy rates due to headwinds formed in the earlier years of the global healthcare crisis, many of which resulted in companies dumping space at record speed and loading up the market with record amounts of sublet and direct availabilities. Property valuations have also plummeted in recent years, largely because San Francisco has been more affected by flexible work than any other market in the United States.
Nothing artificial about it
Over the past year, however, artificial intelligence companies such as Harvey have played a leading role in the sector's prominence as one of the biggest demand generators for space across the city's recovering market.
AI companies have expanded their collective footprint in the city to more than 5 million square feet over the past couple of years, according to data from CBRE, and the sector has the potential to stretch beyond 21 million square feet over the next half decade. If that demand materializes, it has the potential to cut down San Francisco's record-high vacancy rate by about half and catapult the city back to its pre-pandemic standing as one of the strongest office markets in the world.
The city's current vacancy rate is about 23%, according to CoStar data, a significant multiple compared to the rate of less than 6% reported in 2019.
The accelerating AI property demand is a welcome source of activity for San Francisco. In recent months, more than half a dozen companies and fast-growing start-ups have signed leases to accommodate expansions in the city.
OpenAI, for example, is on the hunt for up to 300,000 square feet in the city to add to what has already been one of the fastest-growing footprints among San Francisco's tenant base in recent years. The ChatGPT maker has already finalized two major deals within a span of less than two years — stretching its regional footprint by nearly 800,000 square feet — and its expansion plans could result in one of San Francisco's largest new office deals in half a decade.
Harvey's expansion also follows along a similar trajectory to other AI startups in the city that have steadily added to their real estate footprints.
At the Jamestown-owned Waterfront Plaza office complex, a potpourri of AI startups collectively signed nearly 24,000 square feet of deals over the past several months. One company, Goodfire AI, expanded its space at the complex from 4,100 to 19,200 square feet, the Atlanta-based landlord confirmed.
Once Harvey moves in, it will be one of Kilroy's largest tenants in the nearly 402,200-square-foot property, which has benefited significantly from the regional AI-driven boom.
Up until the beginning of this year, the Third Street building was less than 26% occupied, according to information filed with the Securities and Exchange Commission. Over the past several months, however, fellow AI startup Amplitude signed a deal to take over more than 57,500 square feet at the property that, combined with Harvey's recent lease, will fill five complete floors of the 13-story property.