In some markets sublease space more than doubled and ended Q3 above 700,000 square feet.
The US office market’s recovery from the pandemic is facing several challenges, starting with the uncertainty of when or whether employees will return to work. Another significant headwind will be the dramatic increase in sublease space that now sits on the market.
A new report from Cushman & Wakefield shows just how significant this increase has been: office sublease space increased by 52% in the US in the first three quarters of 2020 to reach around 95 million square feet.
In some markets sublease space more than doubled and ended Q3 above 700,000 square feet. Sublease space increased the most in San Francisco (+488%), Nashville (+211%), Seattle (+182%), Pittsburgh (+174%), Austin (+160%) and Kansas City (+136%).
Manhattan has the most sublease space of any market at 16.1 million square feet, which accounted for 4.0% of its office inventory. Silicon Valley and San Francisco each have more than 6.0 million square feet. Dallas and Chicago round out the top five with between 3.5 and 4.0 million square feet of sublease space. The average market has just under 1.3 million square feet of sublease space.
In 18 markets, San Francisco (7.4%), Fairfield County, CT (5.5%) and Austin (4.2%), the available sublease accounted for more than 2.0% of total office inventory. The US average was 1.8%.
Ten markets did see sublease shrink over Q3. The two most significant were Phoenix -0.8 million square feet and Houston -0.9 million square feet.
C&W also highlights a growing disinclination by tenants to take space in major downtown or CBD areas. It found that the share of sublease space in the US CBDs increased over the last three quarters by 41%. Year to date sublease space in CBD submarkets rose by 68%, while non-CBD markets increased by 44%. Given the fact that COVID-19 has limited the short-term benefits of dense, urban settings, C&W says this growth is not surprising.
To put all this into historical perspective, C&W notes that the US’ available sublease space remained well below its historical peak during the Dot Com High in 2002 at 124 million square feet. On the other hand, the current amount of sublease space on the market is 7.3% higher than at the height of the Great Recession.
C&W ends the report on a positive point, saying that leasing activity may increase as occupiers have more certainty about the future of the health situation. “Sublease space in markets that historically have had limited space and high costs may be attractive to expanding occupiers returning to the office if/when the pandemic begins to subside,” it said.
Indeed, class-A asking rents in CBD markers are down by 2.7%, while sublease space is currently leasing at an average 23.9% discount compared to direct lease space, per data from Colliers International. This is above historical discounts for sublease space.
Source: “Rising Sublease Space Takes Greater Share of Total Office Inventory“