By Paul Bubny
Although office vacancies nationwide have experienced marginal declines recently, sublease space availability has moved in the opposite direction. The new CommercialEdge report from Yardi Matrix shows a 41.7% increase in sublease availability across the top 30 markets between April and November, to 72 million square feet.
Real estate, like politics, is local, and the impact of the sublease space trend has varied across those top 30 markets. Nowhere is it being felt more acutely than in San Francisco, which has seen a 220% increase in sublease space to 5.1 million square feet over the course of the pandemic. (Boston has also felt the impact, with a slightly smaller percentage increase of 212% during this time.)
San Francisco’s current inventory of 6.5 million square feet under construction, or 4.2% of the market’s existing supply comes on top of a 10% increase in office inventory over the past five years. The CommercialEdge report singles the city out as a candidate for an oversupply problem.
“Currently, overall office-using employment is down 3.6% year-over-year, with nearly half of the losses coming in the information sector,” the report states. “This is perhaps why sublease availability has increased more in San Francisco than in any other market. Combine these factors with some of the most expensive leases in the country and tech firms’ embrace of remote work, and absorption of new supply becomes a challenge.”
Currently, 3.5% of all space in San Francisco is available for sublease. In the Bay Area, the sublease vacancy rate is even higher, at 3.8%, and Cushman & Wakefield notes that San Francisco, San Mateo County, Silicon Valley and Oakland/Eastbay are all among the top 10 markets for sublease vacancies.
Austin and Dallas, currently the only two major markets with positive office-using employment growth year-over-year, have also seen available sublease space increase significantly since April, the CommercialEdge report states.
Conversely, the new report from Cushman & Wakefield’s Robert Sammons and David Smith cites declining sublease availability rates in some major markets. Phoenix and Houston were the standouts in this regard during the third quarter: between them, the two markets shed 1.7 million square feet of sublease inventory during Q3.
The Cushman & Wakefield report also compares the current increase in sublease availability to prior downturns. (Spoiler alert: We’ve seen worse.) With inventory up 105.7 million square feet across 83 North American markets, the total surpasses what was seen during the Great Financial Crisis but falls short of the levels reached during the Dot-Com Recession.
“Sublease vacancy as a percentage of inventory across the Americas is 1.8%, which is up from 1.2% at the end of 2019, but in line with the GFC (1.8%) and well below the DCR (2.9%),” says Cushman & Wakefield. And even with millions of square feet in new sublease inventories, San Francisco and Manhattan still have overall vacancy levels below the national average.
Further, EdgeCommercial notes that the occupier dynamics that have led to the current levels of sublease space won’t be with us permanently. “While there are reasons to believe that the traditional model of 40 hours across five days a week at an office building will not return, it is also reasonable to think that companies will want to retain some office space for the social aspects of work that have diminished throughout the pandemic,” the report states. “Team and culture building are nearly impossible to do remotely, and once normalcy returns there will be a long, gradual reassessment of how much space companies need and how best to utilize it.”
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