GlobeSt.com: How will the increase of sublease space affect rental rates?

Andy Lustgarten: An increase in sublet space typically signals the start of stabilizing, and then declining, direct office rents. We haven't seen any decrease in direct rents in 2017, however, as sublet space supply increases, landlords will need to be more competitive on rates and concessions to make transactions.

GlobeSt.com: Is the sublease space rising for a specific segment of the office market?

Brainard: The majority of sublet space has been in the professional service segment of the market with a heavy emphasis on the legal and banking industries. We are just starting to see some of the creative and tech companies put excess space on the sublet market as tech funding has slowed and companies that expanded rapidly may not fill projected employee demand.

GlobeSt.com: Is creative office still in the highest demand, and if so, is this also a contributing factor to rising sublease space?

Lustgarten: Yes, creative offices are still in the highest demand and users are willing to pay a premium for this space. Still, we are seeing an increase in creative office sublet space, but most continues to come from the professional service sector.

GlobeSt.com: What is your outlook on the market?

Brainard: Demand is currently coming from the largest creative users and content providers and primarily on the Westside of Los Angeles, with Amazon and Oracle being two prime examples. Overall, activity has slowed for the majority of professional service and creative users. We project that rates are close to topping out and will stabilize throughout 2017 and into 2018.

The supply of sublease space in on the rise. According to the second quarter report from Savills Studley, sublease space at midyear increase to 5 million square feet from 3.8 million square feet at midyear 2014. In 2009, sublease space had peaked at 8 million square feet before declining, and now it is again increasing. To find out why sublease office space is increasing and what this means for the office market, we sat down with Matt Brainard, office leasing expert, and Andrew Lustgarten, corporate managing director, for an exclusive interview.

GlobeSt.com: What is driving the increase in sublease office space? Half of the available sublease space comes from co-working companies or a shared space situation within a larger firm's footprint.

Matt Brainard: Of the remaining available sublease space, most can be attributed to professional service firms, like lawyers, bankers, accountants and insurance companies, downsizing and/or using their space more efficiently. Within the legal industry, consolidation has triggered many of the full-floor subleases currently available, including Bingham McCutchen's two floors at the top of Wells Fargo Center in downtown LA, resulting from the majority of its lawyers leaving for Morgan Lewis & Bockius.

Lustgarten: Downtown Los Angeles is largely dominated by professional service firms and boasts a good share of the sublease space currently available. The surprise to the sublet market has been recent additions by creative firms such Crispin Porter, Beach Body, Red Bull, eHarmony and Wasserman Media on the Westside. In Wasserman's case, they are relocating early, committing to significantly larger space, and seeking to sublet their space for the remaining lease term.

GlobeSt.com: How will the increase of sublease space affect rental rates?

Andy Lustgarten: An increase in sublet space typically signals the start of stabilizing, and then declining, direct office rents. We haven't seen any decrease in direct rents in 2017, however, as sublet space supply increases, landlords will need to be more competitive on rates and concessions to make transactions.

GlobeSt.com: Is the sublease space rising for a specific segment of the office market?

Brainard: The majority of sublet space has been in the professional service segment of the market with a heavy emphasis on the legal and banking industries. We are just starting to see some of the creative and tech companies put excess space on the sublet market as tech funding has slowed and companies that expanded rapidly may not fill projected employee demand.

GlobeSt.com: Is creative office still in the highest demand, and if so, is this also a contributing factor to rising sublease space?

Lustgarten: Yes, creative offices are still in the highest demand and users are willing to pay a premium for this space. Still, we are seeing an increase in creative office sublet space, but most continues to come from the professional service sector.

GlobeSt.com: What is your outlook on the market?

Brainard: Demand is currently coming from the largest creative users and content providers and primarily on the Westside of Los Angeles, with Amazon and Oracle being two prime examples. Overall, activity has slowed for the majority of professional service and creative users. We project that rates are close to topping out and will stabilize throughout 2017 and into 2018.