DEODATE Insights: The New Urban Playbook: Municipal Specialization and Real Estate Resilience

Inspired by WSJ: “Beleaguered Office Sector Perks Up in San Francisco” by Peter Grant, and supplemented with industry and financial sources.

Critical DEODATE Insights: Business-Focused Downtowns around America see potential roadmap for return to excellence: Commit to one or a few industries for office utilization, address homelessness and crime and focus on street-level retail that works by way of creative incentives.

San Francisco’s AI Surge Signals the Power of Specialization: San Francisco still faces record-high vacancies, yet artificial intelligence firms are reshaping its trajectory. Companies such as OpenAI, Anthropic, and Databricks are filling prime towers, offsetting weakness across much of the office market. This is not a broad-based rebound; it is evidence that a clearly defined sector identity can draw capital, talent, and occupiers even in a challenging environment.

AI Demand Reshapes San Francisco’s Identity: In recent years, San Francisco has shifted from crisis management to deliberate positioning. At the 2023 AI Forward conference, Mayor London Breed branded the city the “AI capital of the world,” aligning civic identity with its strongest sector. That message has been backed by action:

•Permitting reform: Permit SF (2025) simplified approvals, cut fees, and accelerated retrofits for office tenants.

•Tax relief: Targeted credits and gross receipts reductions encouraged AI firms to expand downtown.

•Talent pipeline: The TechSF initiative, with industry partners, deepened the AI workforce base.

•Global visibility: Hosting international conferences reinforced San Francisco’s status as the sector’s natural home.

The results are clear. In 2023, AI firms leased nearly 1 million square feet of office space, with JLL projecting long-term demand of 12–15 million. Average leases have scaled from 5,000–15,000 SF to 30,000–40,000 SF, signaling permanence. (WSJ/JLL)

For real estate and municipal leaders, the takeaway is direct: San Francisco’s resurgence is not just tenant-driven. It is the product of a municipality deliberately aligning brand, policy, and workforce to specialize — and converting that specialization into durable leasing demand.

Los Angeles: A Case for Professional Services: Los Angeles has long been a city of many industries — entertainment, aerospace, real estate, logistics, healthcare. Yet the concentration of professional services firms suggests a clearer identity waiting to be defined.

The market signals are strong. Cushman & Wakefield reports that Los Angeles ranked second nationally for legal-sector leasing in H1 2025 (~700,000 SF), behind only New York. The city is home to one of the largest concentrations of AmLaw 200 firms outside the East Coast (C&W, 2025).

What is missing is visibility in the urban core. Downtown LA, while home to a significant share of the city’s Class A towers, has yet to brand itself as the natural center for professional services focused on law, finance and consulting. A deliberate push — combining targeted tax incentives, expedited tenant improvement approvals, and the hosting of marquee professional conferences — could reposition the central business district as the flagship hub for professional services on the West Coast.

Submarkets in Los Angeles such as Century City, Santa Monica, Burbank and Silicon Beach can focus on entertainment and tech with Downtown Los Angeles targeting professional services in a more central (and better situated given the large area of the Southern California region) location.

The parallel to San Francisco is instructive. Just as San Francisco’s deliberate embrace of AI has translated into leasing momentum and global positioning, Los Angeles could leverage its professional services strength to do the same. The ingredients already exist: talent, firm concentration, and global client connectivity. What remains is for the City to claim that identity and project it outward.

Lessons from Other Hubs: San Francisco and Los Angeles fit within a broader pattern: cities often perform best when they are closely associated with a defining industry. While no city is one-dimensional, history shows that sectoral clarity helps attract and sustain investment, talent, and occupiers.

•New York and finance: global capital markets concentrated in Manhattan towers sustain premium rents and steady absorption.

•Boston and biotech: universities, research hospitals, and venture funding drive one of the tightest lab markets in the world.

•Houston and energy: oil and gas firms anchor entire towers, providing consistent demand across cycles.

•Chicago and food manufacturing: a legacy base that continues to underpin industrial growth and R&D.

The pattern is clear. Cities that lean into a sectoral identity tend to experience more durable demand pipelines and stronger real estate performance than those with diffuse positioning. San Francisco’s AI resurgence and Los Angeles’s professional services momentum reflect the same logic: specialization can be a stabilizing force in otherwise uneven markets.

Closing View: Specialization as a Real Estate Strategy: The Wall Street Journal framed San Francisco’s recovery as an AI-driven rebound. But the deeper story is how deliberate municipal specialization turned sector momentum into leasing power. For other cities, the question is not whether to chase every tenant, but which sector to anchor around.

For real estate investors and occupiers, the implication is clear: the most resilient markets will be those where municipal identity, talent strategy, and policy align to create sectoral hubs.

DEODATE’S role is to interpret these shifts and help corporations, governments and investors connect market realities to real estate decisions. Whether through economic development optimization, site selection, or portfolio performance assessment, we translate industry pressures into strategies that position companies and governments for long-term resilience.

Sources:

WSJ – “Beleaguered Office Sector Perks Up in San Francisco” by Peter Grant. Link here

Medium – “The Rise of New York City as a Global Financial Hub” by Kris Westwood” Link here

EPM Scientific – “Boston is the Largest Biotech Hub in the World” Link here

Greater Houston Partnership – “Why Houston: Energy” Link here

Chicago Council on Global Affairs – “From Stockyards to Plant Protein: Chicago as a Leader in Global Food Innovation” Link here

Webber Logistics – “The Advantages of Using Atlanta as a Logistics Hub” Link here

SF Standard – “Mayor Breed Declares SF the ‘AI Capital of the World.’ Can Leaders Keep It That Way?” by Liz Lindqwister Link here

SF Examiner – “Mayor Breed, Supervisor Dorsey champion permitting reforms for SF businesses” by Daniel Lurie Link here

TechSF – San Francisco Office of Economic and Workforce Development, workforce development initiative. Link here

Cushman & Wakefield – “Legal Sector Leasing Insights | US (H1 2025)” Link here

Globest – “Law Firms in Office-Leasing Mode as Broader Sector Remains Muted Link here