At the September 2021 Virtual LIN Meeting, 10 excellent properties were presented.
Thank you for presenting properties and attending the meeting!
View the September 2021 LIN properties here.
Archives for September 2021
Good News for Office Landlords: Sublet Flood Is On the Wane
Far fewer tenants are putting space on the market compared to last year, and some are taking their spaces back.
As the COVID-19 pandemic in the U.S. reaches its 18-month mark, we are now in a new stage that is changing the equation for both office occupiers and landlords. The highly transmissible Delta variant of the virus is driving up cases and hospitalizations in some regions of the country, largely among the unvaccinated, leading corporate occupiers to struggle with when to bring most of their workers back to the office. At the same time, effective vaccines against COVID-19 are now widely available in the U.S. and last week President Biden announced that the federal government, through OSHA, will require businesses with more than 100 employees to issue vaccine mandates or regular testing for employees who decline to get vaccinated. The new regulations should theoretically make it much easier for large employers to require their workers to come back to in-person work (New York Mayor Bill De Blasio has already done so for the city’s municipal workers starting this week, after mandating vaccination earlier this summer).
As a result, while the amount of sublet office space in the market remains high, the trend of companies putting their offices up for sublease is slowing down with workers gradually returning back to on-site work.
According to a mid-year report from real estate services firm Cushman & Wakefield, the volume of sublet office space in the U.S. doubled over the last year, rising from 67.3 million sq. ft. at the end of the first quarter of 2020 to 132.4 million by the end of the second quarter of 2021. However, the share of sublet space to the market’s total office inventory stood at just 2.4 percent—below the 2.9 percent figure reached during the dot.com bust of the early 2000s.
On a national level, suburban properties account for the greatest share of the overall sublet space, at 57 percent, vs. 43 percent in central business districts (CBDs), Cushman & Wakefield researchers found. In Manhattan, the nation’s largest office market, sublet space, at 22.4 million sq. ft., currently makes up 5.5 percent of total inventory. In San Francisco, the share of sublet space as a percent of total inventory is higher, at 9.1 percent, or 11.0 million sq. ft.
Overall, gateway cities are now seeing slower growth in sublet space coming on-line than U.S. markets as a whole, according to a report from real estate services firm JLL—a reversal in trend lines.
Tenants’ reasons for subletting parts of their office portfolios vary, says Jeff Eckert, president of U.S. office agency leasing at JLL. Commonly, it is in reaction to the company’s financial constraints. In other cases, it is resulting from a proactive approach to workplace strategy. Salesforce, for example, has announced it is subleasing a portion of its office space as a result of the management’s decision to implement more remote work. Or, the decision can be due to entity-level changes, such as a mergers and acquisitions.
A recent survey by Digital.com that included 1,250 businesses of various sizes found that more than 58 percent downsized their office space during the pandemic. Among the reasons cited for the decision, slightly less than one-third said most employees wanted to work remotely, while 23.62 percent indicated the move was to save money. About one-fifth said they got rid of some office space as they tried to deal with employee safety during a pandemic and an additional 22.93 percent pointed to employees being equally productive or more productive working from home (which would ostensibly also save these companies money in real estate costs and utilities).
The good news is that growth in new sublet space peaked in the third quarter of last year, when 22.3 million sq. ft. was placed on the market, notes Eckert. It has been declining ever since, with the rate of expansion in sublet inventory slowing for three consecutive quarters. In the second quarter of 2021, the growth in sublet space reached just 4.5 percent, nearly 80 percent below the peak hit in mid-2020.
The Digital.com survey found that the majority of its respondents (61.23 percent) had no plans to further downsize their office space.
“The sublease market continues to show signs of stabilization,” says Eckert.
In addition, the pace of new listings is decreasing, while sublease space withdrawn from the market continues to increase, he adds. Since the end of March, more than six million sq. ft. of sublease space has been taken off the market, 81.7 percent of which is being re-occupied by the original tenant as part of de-densification efforts and/or renewed confidence in an office-centric work culture.
Real estate services firm CBRE reports that on a national basis, class-A office sublet space currently provides a 13 to 14 percent discount to similar space offered directly by the landlord. For the top 25 secondary markets, the discount is at 20.1 percent, vs. 16.8 percent pre-pandemic. In gateway markets, including Manhattan, Boston, Chicago, San Francisco, Los Angeles and Washington, D.C., the discount averages 11 percent. Pre-pandemic, class-A sublet space in those cities commended a premium of more than 3.0 percent, which is not unusual when vacancies are low and space is in high demand.
Today, tenants backfilling available sublease space are often growing privately-held, venture-funded companies, as well as specialty users such as life science firms. For example, Vir Pharmaceuticals is backfilling a portion of Dropbox’s San Francisco headquarters, according to The San Francisco Chronicle.
Eckert says that while the availability of high-quality sublease space can potentially suppress overall market rents and divert tenants from traditional, directly available spaces, in many cases, available sublease spaces do not compete directly with spaces marketed by landlords. That’s due to different build-out styles and lease terms, as well as the size and location of these spaces, among other factors.
“It’s difficult to characterize the impact of anything on market-rate rents today. In most markets, headline rents have not moved all that much,” notes Matt Vance, research director and senior economist with CBRE. “While tenants put off making long-term leasing decisions, landlords have little incentive to slash prices and compete for occupiers.”
Conditions have been slightly different in two of the nation’s largest office markets, Manhattan and San Francisco, where the availability of sublet space is having an effect on rental rates and where asking rents have declined considerably. “Vacancy and availability have increased higher than equilibrium, and pricing power has firmly shifted to the tenant market,” says Vance.
Source: “Good News for Office Landlords: Sublet Flood Is On the Wane“
Instant Reaction: Consumer Price Index, September 14, 2021
“It seems that inflation is slowly cooling off, confirming the Fed’s view that high inflation will be temporary. Inflation continued to rise quickly in August, but less than the previous couple of months. Over the last 12 months consumer prices rose 5.3% compared to 5.4% in both July and June. Meanwhile, economists and policymakers typically pay close attention to core inflation, which excludes volatile food and energy prices. In August, core inflation retreated to 4.0% from 4.3% in July. It’s also worth mentioning that core inflation increased by 0.1% from July which is the smallest month-to-month increase since February 2021.
With most children and students back in the classrooms, airline fares, used cars and trucks, and motor vehicle insurance all declined over the month. Remember that these were some of the expenditures that boosted inflation during June and July. In contrast, rent prices are picking up. In August, rent and owners’ equivalent rent both climbed 0.3% from July. We have noted previously that rent prices will increase in the following months. Record high home prices (not included in the CPI) hurts affordability, delaying the transition to homeownership for many renters. While rental vacancies are falling, this translates to a higher rental demand which is expected to push up rent prices.”
U.S. Sublease Office Market Sets Record in 2Q; Growth Slowing
The amount of sublease office space in the United States reached a record 132.4 million square feet at the end of the second quarter – the seventh consecutive quarterly increase – according to Cushman & Wakefield.
Last quarter’s total was a 7.1 percent increase from the previous quarter and a 97 percent increase from the first quarter of 2020, before the coronavirus pandemic led to a sharp reduction in office usage.
But it was the third straight quarter with a decline in the percentage of sublease space added to the market. Cushman, which has been tracking such data since the mid-1990s, sees the pace of the sublease market continuing to slow or even decline later this year or next year as companies return to their offices.
Employers that have put sublease space on the market could decide to re-occupy it, while companies looking for space may choose to sublease rather than sign leases directly with landlords. That’s because sublease space is typically offered at a discount, has shorter lease terms and is already built-out compared with direct space.
“We’re seeing a trend in the right direction, which is less sublease space being added,” said David C. Smith, Cushman’s head of global occupier insights. “Our expectation is that over the next few quarters, we will start to see the sublease space come down.”
Smith noted that many companies had expected to return to the office this month, but the delta variant has postponed those plans. Still, he doesn’t “think the delta variant has shifted portfolio strategy to where companies are more likely to put more sublease space on the market.”
The sublease market at the end of the second quarter accounted for 2.4 percent of the 5.5 billion-sf total U.S. office inventory. That is higher than the depths of the Global Financial Crisis in the fourth quarter of 2009, when sublease space accounted for 1.8 percent of the office inventory. But it is lower than following the dot-com crash and the aftermath of the 9/11 terrorist attacks, when sublease space reached a high of 2.9 percent of the office inventory in the second quarter of 2002.
The amount of sublease space is most pronounced in the gateway markets of Boston, Chicago, Los Angeles, Manhattan, San Francisco and Washington, D.C., which had a combined 47 million sf of sublease space at the end of the second quarter. That accounted for 35.5 percent of the country’s sublease space and 3.7 percent of the total office inventory in those six markets.
Manhattan and San Francisco, in particular, have been particularly hard hit with 22.4 million sf and 7.8 million sf of sublease space, respectively. That accounts for 5.5 percent of Manhattan’s office inventory and 9.1 percent of San Francisco’s inventory.
Government officials in those cities instituted restrictive lockdown policies to stem the spread of the coronavirus, causing many companies to work from home for an extended period. Also, those cities have a large proportion of high-rise buildings that are not conducive to social distancing and rely on employees commuting to work via subways and other mass-transit options. These factors resulted in employers putting space on the sublease market.
However, there are signs that the sublease market is improving in San Francisco. The city saw a 227,000-sf quarterly decline in the amount of sublease space at the end of the second quarter. And although Manhattan added 2.5 million sf of sublease space last quarter, Smith noted that some tenants plan on reclaiming that space or opting to sign subleases rather than direct leases.
“I think we’re likely near the top in Manhattan,” Smith said.
Meanwhile, Cushman has been noticing a trend of increasing sublease space in suburban U.S. markets compared to downtown, or central business district, areas. Last year, for instance, 54 percent of the sublease space added to the market was in the suburbs even though suburban office buildings account for about two-thirds of the U.S. office inventory. But for the first half of this year, 63 percent of the sublease space additions have been in the suburbs, which is more in line with the historical average.
Source: “U.S. Sublease Office Market Sets Record in 2Q; Growth Slowing“
