Is AI a boom that’s just getting started or a bubble about to burst?
Whichever you think, in San Francisco, once again the epicenter of a tech revolution, one thing is certain: AI is driving an already expensive housing market completely nuts.
In March, the median home price in the city topped $2 million. Bidders regularly pay more than $1 million above listing prices for houses that, in most other places, would be unremarkable single-family homes with a few bedrooms and small backyard. The California city has both the highest and fastest-rising home prices in the country, according to Redfin.
The median monthly price of a one-bedroom apartment is hovering around $4,000. Since Covid, rent has roughly doubled, at times hitting $10,000 per month on the iconic Victorian mansions sprinkled throughout the city, according to one real estate broker.
Real estate insiders say the spike in property prices is unmistakably tied to the AI race as start-up investors and major tech companies alike throw around huge sums of money to attract top talent to the region.
“They make really good money,” commercial real estate broker Dimitris Drolapas told The Independent. “We’re seeing $500-, $600-, $700,000 of income isn’t unheard of, plus stock and all that.”
The AI boom has helped drive a “complete 180” from the pandemic era, he added, when San Francisco was a poster child of urban dysfunction with residents leaving in droves and the downtown area resembling a ghost town due to remote work.
Mo Zhu, an activist with local housing group SF YIMBY, lives in Mission Bay – a revamped waterfront district that houses offices for the leading AI companies who have helped drive a commercial real estate comeback around the city and a return to in-office work.
Zhu’s own rent recently went up by 10 percent, a fact he attributes to the AI-related investment in the area. At first, he felt lucky the price hike wasn’t worse – then realized it was shocking to feel fortunate to be facing a double-digit increase in his bills.
“I was upset that I felt lucky,” he said. “10 percent is not lucky in any objective sense of the world…I certainly was directly impacted by that with OpenAI down the street and Anthropic up the street.”
Many of his friends want to move into the neighborhood, which is home to scenic parks and the new Warriors NBA stadium, but can’t afford it.
“They work in high-paying tech jobs,” he said. “They’re not even able to…It’s really squeezing out even families in good economic situations. I can’t imagine what it’s like for families who are not.”
The squeeze is only going to worse this year, thanks to three blockbuster initial public offerings from AI-related companies with deep ties to the city and state.
Elon Musks’s SpaceX just went public, making Musk the world’s first trillionaire, and the company soon expanded on its existing xAI division with a $60 billion deal to acquire Cursor, a San Francisco-based AI coding agent start-up.Rivals OpenAI and Anthropic are next up for sale, and will mint plenty of other new fortunes, too. Some Anthropic employees could be set to earn $50 million from the I.P.O. Together, the three I.P.O.s could generate as much as $4 trillion in value, Barron’s estimates. One local real estate agent predicted these offerings will unleash a “thermonuclear wealth explosion deposited squarely in San Francisco.”
In anticipation, sellers around the region have been offering to accept shares in these companies instead of cash for home purchases, according to reports.
The influx of people and capital is welcomed news for some but it’s putting enormous pressure on the city’s existing lower-income renters, according to Jennifer Fieber of the San Francisco Tenants Union, as landlords stand to gain from replacing longstanding tenants with wealthier new arrivals. The city has struggled for years to build enough affordable housing and keep rents feasible for lower-income people, and state law prevents cities from enacting rent control on large swathes of the housing stock.
“Because the rents have increased in the city, there’s going to be huge pressure to get rid of the people you have, regardless of whether they’ve been paying on time,” Fieber said.
There is also concern that the AI industry might be a bubble about to pop – with investors irrationally assigning too much faith, capital and value to ventures that won’t survive, while letting this same optimism drive other major investments in their lives, such as splashy home purchases.
Warning signals of a looming market correction are already there: AI companies are burning through hundreds of millions of dollars building out data centers while struggling to turn a profit, and corporate clients have begun rationing spending on AI for their teams, all while the stock market is hovering near record highs thanks to optimism in the tech advancement.
So far, according to Mike Simonsen, chief economist at real estate firm Compass, the AI boom hasn’t sent the San Francisco property market into full-on bubble territory just yet, where “junk starts getting overpriced.” Instead, the craziness is more concentrated.
In May, according to Compass data, homes were selling at 124 percent of their asking prices. The city’s wealthiest have begun “massive overbidding” on an even smaller basket of the most attractive homes in the most desirable areas. Last month, a five-bedroom mansion overlooking San Francisco Bay in scenic Pacific Heights sold for $3 million over asking price, and in nearby Presidio Heights, another palatial home went for nearly $4 million above the sticker price.
“Much of the wealth generation, especially around real estate, as a result of the AI companies is actually already in the system,” Simonsen said. “These are people who are already moved into town with big salaries and go, ‘I‘ll take whatever apartment is available.’”
“The concentration becomes overwhelming,” Simonsen added of those now pursuing top homes in the city. “Someone who is not armed with millions in new wealth, the scenario is just really stacked against ‘em.”
Ironically, according to Mark Hogan, a San Francisco-based architect at OpenScope Studio, the AI boom has coincided with a hellish round of layoffs and companies leaving California within the wider tech industry.
“The IPO mania is real and there are people making a lot of money, and there are clearly people moving here and taking very high-paying jobs at AI companies, but that’s also balanced with other people becoming unemployed and other jobs moving out of the city,” he said. “So there’s kind of a mix of many different things going on at once here.”
Simonsen, the Compass economist, said the soaring AI industry could eventually turn and resemble the early 2000s dot-com crash, which sent San Francisco real estate values plunging along with it. During the dot-com crash, tens of thousands of Bay Area workers lost their jobs, and San Francisco real estate took its worst hit since the Great Depression. By the time the bubble popped, commercial rents had fallen 60 percent from their year 2000 peak and residential rent was down 12 percent in the city.
If the AI economy suffers a similar bust, it could mean similar impacts. AI workers would lose their high-income jobs, and the stock some used as collateral to get home loans — or pay for houses outright — could become nearly worthless.
“All of a sudden, the stock is worth 90 percent less,” Simonsen said of this scenario.
In a downturn, homeowners also would not be able to sell their properties at the same high prices they paid for them, compounding the economic pain.
As for solutions to prevent some kind of AI-related housing apocalypse, experts told The Independent about a variety of reforms that could make a difference. These include expanding rent control, cutting down on city bureaucracy, and supporting existing pro-housing zoning reforms and state laws.
Groups like SF Yimby are championing mid-rise, “single-stair” apartment buildings, which feature one central staircase, rather than the multiple required under state law, as a way to maximize the number of units in buildings on San Francisco’s typically small property lots.
San Francisco Mayor Daniel Lurie and District Supervisor Myrna Melgar are backing $70 million bond to raise funds for affordable housing and a November ballot initiative to increase the city’s contribution to its affordability-focused Housing Trust Fund.
Whatever the future of San Francisco housing looks like in the age of AI, it doesn’t seem likely the city will return to the Covid days any time soon, when landlords were lowering prices to entice people to come back and keep residents who were on the fence about leaving. In an April 2020 survey, more than a third of San Francisco landlords said they had granted reductions, and 10- and 20-percent cuts could be seen on rents everywhere from finance-focused downtown to leafy, residential Glen Park.
Jennifer Fieber, the tenant activist, was one of those who benefitted from this brief window of declining prices. “Those days,” she said, “are definitely gone.”
As Drolapas the real estate broker sees it, the region is stuck in a bind. A booming economy strains San Francisco’s renters, and a declining economy offers them a silver lining. Neither scenario is a win-win for the city as a whole.
“There’s always good, there’s always bad,” he said. “The good is it’s nice to see some economic stimulation, especially after things were so dire here. The bad would be, you know, it’s hard for everyone to be able to afford to live here. That’s really where the conundrum is.”
