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.