Office Sublease Supply Grows As Rents Wane

The sublease supply in West L.A. is rising, and it is likely to have a big impact on office rents this year. A surplus of sublease supply came onto the market in the first quarter of this year, and it is giving office tenants—especially tenants looking for creative and quality space—more options. While the sublease supply hasn’t impacted rental rates yet, the spaces are getting healthy attention from potential tenants.

“We are seeing a glut of sublease space in the market, and I think that is going to hinder the ability for landlords to increase rental rates,” Michael Arnold, EVP at NAI Capital, tells GlobeSt.com. “Landlords are going to have to rethink their ability to push rents without taking a pause and evaluating the competitive offers on the market. I don’t think we are going to continue to see this extreme escalation in rental rates.”

The West L.A. office market has seen the biggest rental gains. Over the last five years, rents in the market have increased 42%, and last year alone, they were up 5.3%. Not all submarkets in West L.A., however, continued to see strong rent growth. Playa Vista rents were down 4.9%, for example. “There wasn’t as much sublease space on the market last year as compared to today,” says Arnold. “At this point, we really haven’t seen the absorption of the sublease space yet, but people are looking for economic alternatives to achieve the same goal, which is to be in that cool, creative space and have a professional environment.”

This year, Snapchat dumped 400,000 square feet of creative space on the sublease market in Venice, making it one of the largest sublease opportunities—but there are plenty of options. Arnold, who is an office tenant rep, says that a 25,000-square-foot sublease space at Howard Hughes Center is getting multiple tours, and a 20,000-square-foot space in Culver City that he is bringing to market this month has already gotten cold call inquiries from interested tenants.

In addition to potentially lower rental rates, sublease spaces also offer flexibility for growing tenants, which can make them even more appealing. This is especially true in the Silicon Beach market, where there is a higher concentration of tech and creative start-ups. “The term is important as well,” explains Arnold. “A lot of small tech companies are looking for flexibility, and they don’t want it to lock into long-term leases today because they aren’t sure where their business is going to be in 18 to 24 months. It is a sign of companies reevaluating how they are working effectively, and I think there is a push to mesh the collaborative open space environment and private offices.”