Reports at both the local and national levels have made the point that office sublease space has increased during the course of the pandemic—as is typical during an economic downturn. However, the maxim that “all real estate is local” certainly applies here.
“National office market fundamentals continue to face downward pressure from sublease space, which are adding to vacancy and generating negative net absorption in many major markets,” Newmark’s Liz Berthelette says in a new report. “However, not every metro area is facing comparable sublease conditions.”
Many tech-centered, gateway markets experienced above-average growth in sublease availability during 2020, with sublease listings accounting for a greater share of vacated spaces in large urban centers. Chicago’s availability rate more than doubled in 2020; in San Francisco, the rate more than tripled.
“Boston, Manhattan and Los Angeles have posted outsized increases of sublease space as well,” Berthelette reports. “As a result, several markets are facing more excess office space than at any time since the early 2000s.”
However, amid ongoing weakness in the national office market as corporate users continue to re-examine their real estate footprints, “pockets of strength are emerging,” according to Berthelette.
“More sublet spaces were returned to the market in Manhattan, Chicago, Los Angeles and Atlanta in the early months of 2021. Importantly, though, the growth of sublet space availability in Boston, San Francisco and Washington D.C. has plateaued in recent months,” even experiencing modest declines compared to Q4 2020 levels.
A slight uptick in tenant activity in the sublease market, combined with some leases expiring and some sublease opportunities being withdrawn, has contributed to stabilization in these markets. Notably, some sublease spaces were listed on a speculative basis, largely by tech companies “testing the waters,” and have since been pulled back.
Furthermore, the current sublease inventory doesn’t represent a new record, at least not on a percentage basis. As 2020 ended, available sublease space reached 154 million square feet nationally, representing 3.1% of total office inventory and 15.7% of all availabilities.
“Comparatively, sublease rates topped out at 2.7% following the Great Recession and 3.2% during the dot-com crash of the early 2000s,” Berthelette says. “In short, sublease space is elevated, but not at unprecedented levels.”
Paul Bubny serves as Senior Content Director for Connect Commercial Real Estate, a role to which he brings 13-plus years’ experience covering the commercial real estate industry and 30-plus years in business-to-business journalism.
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