GlobeSt.com: What is driving the increase of office subleases?

Blake: Companies/tenants are learning how to manage their occupancy cost by reducing the square footage they use. There continues to be a movement toward creating more open, communal work areas with more flexible, tech-connected workstations while doing away with secluded, individual offices of dark oak and smoked glass that typified the traditional space years ago. And business reasons too. In February, Nestlé USA, Inc. announced that it would be relocating its corporate headquarters from Glendale to Rosslyn, Virginia. Nestlé put nearly 380,000 square feet at 800 N Brand Boulevard on the market for sublease.

GlobeSt.com: How could this affect rents and tenancy in the office market?

Blake: Competing sublease space within a building gives a tenant additional leverage for direct space. Additionally, if a company wants a longer-term lease than the sublease, they can use the discount sublease rate & term plus an extension term direct with the building. This is a blend and extend strategy will create a below market long-term deal.

GlobeSt.com: Which areas of Los Angeles are seeing the most subleases offerings?

Blake: The Westside office market is the largest office market in Los Angeles and hold the largest amount of sublease space at over 1.6 million square feet followed by the Tri-Cities with just over 1 million square feet. Sublease space on the market shot up 82.4% from the prior quarter in the Tri-Cities because of Nestlé sublease.

GlobeSt.com: As a result, what is your general office market outlook for the second half of the year?

Blake: Going into the second half of 2017, several major projects are expected to be finished. The Los Angeles office market will see rising average rents and vacancy as the new space comes on line. Three major projects are currently scheduled for delivery include: the Hanjin Group's 400,000 square foot Wilshire Grand Center in Downtown LA, C3 in Culver City, which will deliver 281,000 square feet, and CUE at Bronson Studios in Hollywood with 91,953 square feet to be occupied by Netflix. Demand for office space is being driven by employment growth from the office occupying industry sectors. Employment growth is broad based coming from a variety of industries which bodes well for building owners looking to get their newly constructed office projects occupied.

The total inventory of available sublease space will sit on the market longer and is expected to be absorbed at a lower rate. Sublease rents remained flat over the quarter—an indication that the mounting sublease space on the market is holding rents steady—trending lower as sublessors lower their rents in order to attract tenants. The total amount of available office space for sublease has increased in the first quarter of 2017. As of the first quarter, there were 4.9 million square feet of available sublease space on the market, an increase of 7.6% over the quarter and 11.5% over the prior year. This quarter, 390,460 square feet were subleased, which is 22.1% less than a year ago.

Office subleases in Los Angeles have surged. A new report from NAI Capital shows the office subleases are up 7.6% for the quarter and 11.5% year-over-year. The report also showed that this space is being absorbed at a slower rate. In the first quarter, there were 390,460 square feet of subleases completed, which is a 22% drop from this time a year ago. The increase in office subleases will give new tenants and tenants with expiring leases leverage in negotiating rental rates, especially for tenants who can take a shorter lease term. To find out how the increase in subleases is affecting the office market and a forecast for the remainder of the year, we sat down with Forrest Blake, a VP at NAI Capital, for an exclusive interview.

GlobeSt.com: Why is it important to track office subleases?

Forrest Blake: It is important to track office subleases because subleases give you an indication of what companies/tenants feel about their business. More sublease space means lower confidence in the market place. When tenants put more and more space on the market for sublease that can saturate the market, creating downward pressure on rents. Direct space tells you what the landlords are thinking. Increasing rental rates means landlords are bullish, seeing higher demand, they push rents up.

GlobeSt.com: What is driving the increase of office subleases?

Blake: Companies/tenants are learning how to manage their occupancy cost by reducing the square footage they use. There continues to be a movement toward creating more open, communal work areas with more flexible, tech-connected workstations while doing away with secluded, individual offices of dark oak and smoked glass that typified the traditional space years ago. And business reasons too. In February, Nestlé USA, Inc. announced that it would be relocating its corporate headquarters from Glendale to Rosslyn, Virginia. Nestlé put nearly 380,000 square feet at 800 N Brand Boulevard on the market for sublease.

GlobeSt.com: How could this affect rents and tenancy in the office market?

Blake: Competing sublease space within a building gives a tenant additional leverage for direct space. Additionally, if a company wants a longer-term lease than the sublease, they can use the discount sublease rate & term plus an extension term direct with the building. This is a blend and extend strategy will create a below market long-term deal.

GlobeSt.com: Which areas of Los Angeles are seeing the most subleases offerings?

Blake: The Westside office market is the largest office market in Los Angeles and hold the largest amount of sublease space at over 1.6 million square feet followed by the Tri-Cities with just over 1 million square feet. Sublease space on the market shot up 82.4% from the prior quarter in the Tri-Cities because of Nestlé sublease.

GlobeSt.com: As a result, what is your general office market outlook for the second half of the year?

Blake: Going into the second half of 2017, several major projects are expected to be finished. The Los Angeles office market will see rising average rents and vacancy as the new space comes on line. Three major projects are currently scheduled for delivery include: the Hanjin Group's 400,000 square foot Wilshire Grand Center in Downtown LA, C3 in Culver City, which will deliver 281,000 square feet, and CUE at Bronson Studios in Hollywood with 91,953 square feet to be occupied by Netflix. Demand for office space is being driven by employment growth from the office occupying industry sectors. Employment growth is broad based coming from a variety of industries which bodes well for building owners looking to get their newly constructed office projects occupied.

The total inventory of available sublease space will sit on the market longer and is expected to be absorbed at a lower rate. Sublease rents remained flat over the quarter—an indication that the mounting sublease space on the market is holding rents steady—trending lower as sublessors lower their rents in order to attract tenants. The total amount of available office space for sublease has increased in the first quarter of 2017. As of the first quarter, there were 4.9 million square feet of available sublease space on the market, an increase of 7.6% over the quarter and 11.5% over the prior year. This quarter, 390,460 square feet were subleased, which is 22.1% less than a year ago.