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Sublease Inventory Increases Even as Office Occupancy Rebounds
Even as the Delta variant is adding an element of uncertainty to the timing as well as the logistics, office occupancy is currently higher than at any point in 2021’s first half and occupiers are setting firmer targets for workers to return to the office, report Cushman & Wakefield’s Sandy Romero and David Smith. “And as this plays out, companies will begin to have a clearer picture of how much space they will need over the next few years,” they write.
That being said, sublease space continues to be added to the market, although at a slower pace. Total North American sublease space climbed to 147 million square feet after 8.8 million square feet of new space came online during the second quarter.
Across 90 North American markets tracked by Cushman & Wakefield, office sublease space is up 76% year-over-year, and up 99% since the beginning of the pandemic in Q1 2020. On a percentage basis, Canada leads with a 92% Y-O-Y increase, with U.S. sublease inventory up 74% and Mexican inventory up 41%.
Unsettling as the increases may seem, office leasing veterans with long industry tenures have seen this movie before. Both the Dot-Com Recession of 2001-2002 and the Great Financial Crisis that began in Q3 2008 saw sublease inventory continue to increase for several consecutive quarters.
More specifically, sublease inventory increased for approximately two years, or eight quarters, during the two prior downturns. Q2 of this year marked the seventh straight quarter of positive sublease space growth dating back to Q4 2019, suggesting that the sublease market may be reaching its peak, write Romero and Smith.
“The absolute amount of sublease inventory has surpassed the two previous recessions,” they write. However, as a percentage of total office inventory, the Q2 2021 total of U.S. sublease space still represents a smaller proportion of total office inventory than during the Dot-Com Recession (2.4% in Q2 2021 vs. 2.9% in Q2 2002).”
Sublease space accounts for a small proportion of total office inventory in the U.S. (2.4%) and Canada (3.2%). And it currently accounts for 14% of overall vacancy in the U.S. and 24% of total Canadian vacancy.
Over the course of the pandemic, the concentration of new sublease space has shifted away from central cities to the suburbs. Romero and Smith note, “Since the beginning of the pandemic, 47% of added sublease space has been in CBD submarkets. However, in the first half of 2021, the pace of growth in CBDs has slowed down, with CBD submarkets accounting for 40% of new sublease space over the past two quarters.”
- ◦Lease
