The Key Differences That Landlords Need to Know
By Hans Hansson, President and founder of Starboard CRE
San Francisco, a city synonymous with technology and innovation, has witnessed two landmark booms in commercial real estate over the past three decades: the dot com era of the late 1990s and the current explosion of artificial intelligence (AI) startups. While both periods reshaped the city’s office space landscape, the structural details underlying their growth—especially vacancy rates and lease agreements—reveal both striking similarities and stark differences.
The Dot Com Boom, spanning roughly from 1995 to 2000, heralded a tidal wave of internet-based companies into San Francisco. Startups competed feverishly for talent and, by extension, for prime office real estate. Before this surge, the city’s commercial property market was relatively stable, with vacancy rates hovering between 7 percent and 10 percent in the early-to-mid 1990s. As tech companies proliferated, these rates plummeted, falling below 2 percent at the height of the boom. Landlords, sensing unprecedented demand, gained significant leverage over lease negotiations.
In this seller’s market, landlords predominantly offered traditional lease terms, typically requiring tenants to commit to five- to ten-year agreements. These long-term leases provided building owners with a secure, predictable income stream, which in turn supported building valuations and financing arrangements. Startups, flush with venture capital and eager to project stability, often accepted these terms despite their business volatility. The expectation was rapid growth and continued funding, even as few companies turned a profit.
Unlike the dot-com boom, the AI surge is unfolding in a market shaped by the pandemic and a shift toward hybrid work
The long-term nature of these leases allowed landlords to secure favorable financing and invest in property improvements. Buildings were often renovated or repositioned to accommodate the influx of tech tenants, with the expectation that high occupancy levels and long-term commitments justified the risk and cost.
A New Wave of Demand
The 2020s have ushered in a fresh wave of innovation, with AI companies rapidly scaling in San Francisco. The city, despite persistent headlines about remote work and tech exodus, has become a magnet for AI startups seeking proximity to venture capital, talent, and each other. However, this new surge is playing out against a dramatically different commercial real estate backdrop.
Unlike the dot-com boom, the AI surge is unfolding in a market shaped by the pandemic and a shift toward hybrid work. As of the mid-2020s, San Francisco’s office vacancy rate hovers near historic highs, frequently cited between 25 percent and 30 percent. This glut of available space stems from widespread downsizing by major tech tenants and a persistent reluctance among firms to return to full-time, in-person work. For AI startups, the environment offers unprecedented choice and leverage.
Whereas dot-com companies once signed multi-year leases for large, often unfurnished spaces, today’s AI firms are seeking flexibility above all. Instead of long-term commitments, startups now prefer one-year (or even month-to-month) fully furnished offices. This model allows them to scale rapidly, minimize capital expenditure, and pivot with ease as their needs evolve or funding ebbs and flows.
This dramatic shift in tenant expectations has profound implications for building owners. Short-term leases, combined with the need to furnish and manage spaces, diminish the predictability of income streams. Landlords face greater operational complexity and often must offer incentives—such as free rent periods, build-out allowances, or flexible layouts—just to attract tenants. Financing becomes more challenging as lenders prefer the security of long-term, creditworthy occupants. Valuations may suffer as income volatility increases, and building owners must adapt, transforming traditional office towers into co-working spaces or amenity-rich environments more suited to dynamic tenants.
While both tech surges in San Francisco have unleashed waves of new companies seeking office space, the context—especially in terms of vacancy rates and lease structures—has transformed. Today’s landlords must adapt to a new reality of tenant flexibility, operational agility, and financial uncertainty, even as a new generation of innovators carries the city’s legacy of reinvention forward.
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