Rise in Office Sublease Space Spells Good News for Active Tenants

The office market has been one of the most impacted by the pandemic. With remote work policies in place for foreseeable future, many businesses have looked for ways to shed existing office square footage. The trend has created a wave of new sublease supply, according to a new report from Colliers International.

While a large sublease supply will have implications on the direct lease market, it could mean good news for tenants actively looking for office space. This is particularly true for businesses that are currently reassessing their office needs and are wary of signing a long-term lease. The sublease market has the potential to provide those users an opportunity to lease high-quality office space at favorable lease terms.

Already, class-A asking rents in CBD markers are down by 2.7%, but sublease space is currently leasing at an average 23.9% discount compared to direct lease space, per the data from Colliers International. This is above historical discounts for sublease space. The sublease discount historically has been around 20% below market rate, Jonathan Adelsberg, a partner and chair of the leasing department at law firm Herrick Feinstein LLP, told the Wall Street Journal . “Given the plethora of space on the market today, we expect to see discounts greater than that,” he said.

In the second and third quarter, the supply of sublease space increased by 35% to 170 million square feet. San Francisco led the nation with the sublease market growing to 7.4 million square feet, nearly 8% of the city’s total office supply. By comparison, Seattle ranks second for its sublease market, but the supply in the Pacific Northwestern city only accounts for about 3.5% of the total market supply.

The discount rate did not seem to be proportional to the sublease supply growth, however. Manhattan is in the middle in terms of supply growth, with 3.1 million square feet on the market, about 23% of the total availability rate. The sublease supply increased to In San Francisco, the discount rate is about 11.3%, despite the significant surge in supply. In Houston, on the other hand, the discount rate is nearly 50%, but the total sublease supply accounts for less than 3% of the total market inventory and only a tick above the national average.

The Colliers report had a mixed outlook on this trend, acknowledging that the return to office space or a normal work environment could still be several quarters away and in the interim, the sublease supply is likely to continue to rise. However, the recent news of two vaccines could also help to fuel recovery.

In the meantime, landlords are also adjusting lease terms to attract tenants and compete with the growing sublease market. “I was talking to a landlord, and he was mentioning that he was starting to do short-term leases, which you wouldn’t have seen a lot before this [COVID],” Withers attorney Vasi Yiannoulis-Riva told GlobeSt.com in an earlier interview, “But people are adjusting. They’re trying to ride this pandemic out and see what happens a couple of years down the line. And so they need to compete with this sublease space, which is usually on shorter-term arrangements.”