Market Street in downtown San Francisco. The city’s office market is coming back to life on the back of an AI leasing boom while AI companies seem to be avoiding Greater Boston, according to a new report. iStock illustration
Some days it feels like the 1970s all over again, what with the crazy high prices, slow or no growth, chaos in Washington and sour grapes all around.
The one bright spot – such as it is – has been the AI boom, which is single-handedly keeping the U.S. economy afloat with massive research and data center spending, while gobbling up empty office space in at least two major American downtowns reeling from the shift to remote work.
Yes, there is a lot of controversy surrounding the AI boom, especially when it comes to data center development and its impact on the electric grid and the environment.
Some of it is real, but a lot of it is likely overblown, reflecting the rise of one of the most disturbing and stifling social trends the nation has ever seen: the souring of the traditional American belief in progress and growth. Its replacement: a cynical form of NIMBYism that sees a greedy scam or the next Love Canal behind every new proposal for an apartment complex or lab building.
Yet the AI data boom is putting lots of skilled, blue-collar tradespeople to work across the country, after decades of concern over the diminishing prospects for the two-thirds of the American workforce that does not have a college degree.
Real, Blue-Collar Jobs
Google is pumping $50 million into a long-time training partnership between the International Brotherhood of Electrical Workers and contractors to boost to train 30,000 apprentices over the next three years, an increase of more than 50 percent, The New York Times reported last week.
However, there’s also a big problem with this picture. The region that was a birthplace of the industrial revolution in the early 19th century is being increasingly bypassed by a seismic shift of similar historic proportions and implications.
The AI revolution is increasingly happening everywhere but Massachusetts and the rest of New England. There’s a proposal for a $4 billion data center in the old industrial city of Westfield in Western Massachusetts, and a sizable one proposed for Maine, but that’s about it.
We could certainly use the jobs. With the collapse of the once-booming office and lab markets, the local construction market is in a significant slump. And while there is huge, pent-up demand for new homes and apartments, residential construction has also fallen off amid high borrowing and construction costs.
As the big tech companies roll out the infrastructure of the future everywhere but here, is it any wonder that the Massachusetts economy has been increasingly stuck in stagnation mode over the last few years, and now lags the nation as a whole?
Boston AI Office Demand Crashes
But even if we are not getting all those big data center projects, we can always count on the AI sector to gobble up office and research space in Boston and the suburbs, or so the thinking goes.
With our top research universities and highly skilled workforce, everyone wants to be here, right?
Maybe, but apparently just not as much as they did just a couple of years ago.
In fact, Greater Boston is now seeing a drop in real estate activity by AI companies, even as they expand their footprints in other markets, a new report finds.
Demand for office space by AI companies in the Boston metro market has plunged by an alarming 48 percent so far this year, according to a new report by VTS, a major technology platform used in the commercial and residential real estate industries.
One bright spot – of a sort – was Boston Dynamics’ deal for 320,000 square feet at Reservoir Place in Waltham.
The robotics company plans to invest $100 million into the Trapelo Road property owned by Boston Properties to build a research center which will, in part, work on AI projects along with the company’s more famous robotics work.
AI Leasing Up Elsewhere
The drop in AI space demand in Boston stands out, with the next runner-up, Los Angeles, having seen a worrying, but less severe, 12 percent decline.
“Neither market is part of the AI demand picture,” the report states.
Ouch!
Meanwhile, AI company demand for office and research space is booming in Austin, Texas, New York City and the San Francisco Bay area.
The Texas capital has seen AI demand for space go up by 48 percent, or the same number that it has dropped in the Boston market – a welcome development in a metro where the office vacancy rate hit a post-pandemic high of almost 25 percent last year, according to research by commercial brokerage Newmark. AI firms are currently looking for 1.19 million square feet of space there, VTS reports. That makes it the biggest concentration of demand outside of the Bay Area and New York City, despite a startup scene that’s historically lagged far behind those cities’ famously deep pools of talent and tech firms.
And the economics team at the brokerage Redfin says San Francisco’s home prices have taken off like a rocket (again) because of all the AI talent rushing into town.
This, in a city that was perhaps the poster child for the remote work-driven “death of downtown” following the COVID-19 pandemic, and where the office vacancy rate is still just above 30 percent, according to brokerage Cushman & Wakefield. AI companies leased just over 2.9 million square feet of offices in San Francisco alone in the first and second quarters, the brokerage said, on top of 2.1 million last year.
For comparison, Greater Boston has almost 45 million square feet of empty or available office space right now, according to brokerage Colliers.
Scott Van Voorhis
Why Is Mass. Missing Out?
So why are AI companies less enthusiastic about the Boston market, what with all our top research universities like Harvard and MIT?
It could be the mixed signals AI companies are getting from elected officials in Massachusetts.
Gov. Maura Healey has pushed an initiative to make Massachusetts a major AI research hub.
But she’s also recently paused plans for a tax credit for a massive AI data center proposed for the old Western Massachusetts city of Westfield, even though it is the only major data center proposed so far in the entire state.
And it’s not like many progressive politicians, which Massachusetts famously has in spades, have rushed to embrace the technology and its leading companies in the years since it debuted in 2022.
Maybe not so coincidentally as well, Austin has managed to push apartment rents substantially lower after a decade-long campaign to peel back zoning restrictions and boost residential construction.
By contrast, rents and home prices are higher than ever in Greater Boston, the weather is nothing to write home about much of the year and local and state taxes are far higher than in Sun Belt states.
If Massachusetts wants a piece of the AI action, then it had better get cracking and get in the game before it’s too late.
Scott Van Voorhis is Banker & Tradesman’s columnist and publisher of the Contrarian Boston newsletter; opinions expressed are his own. He may be reached at sbvanvoorhis@hotmail.com.
