The Rate of Sublease Space Entering the Market Is Slowing

Sublease space is entering the office market this year at a much slower rate than in 2020, according to a new report from Cushman & Wakefield, and all signs are pointing toward a continued decline in growth. 

About 11.7 million square feet of vacant sublease space was listed in the first quarter of this year, a decrease from the 16.4 million square feet added in the fourth quarter of 2020. For the sake of comparison, 19.4 million square feet was added in the third quarter. Of the 138 million square feet of negative absorption that has occurred during this economic cycle, 41%—or 56 million square feet—was related to the increase in vacant sublease space.

The Cushman report also notes that companies have been more aggressive than usual in listing sublease space than they were during the Great Financial Crisis. Between 2008 and 2010, 33.1 million square feet of sublease space hit the market and accounted for 32% of the -99.9 million square feet of negative absorption posted during that time. But the rate was much slower and accrued over two years—about 4.7 million square feet per quarter. Conversely, the post-COVID era has shown 14.1 million square feet of negative absorption over the last year. And the peak sublease vacancy rate during the Great Recession was 1.8% of total inventory at year’s end in 2009, as opposed to 2.3% today.

In addition, sublease space as a proportion of office inventory is still below the peak of 2.9%, according to the report.

On a recent earnings call, Michael Franco, Vornado Realty’s president and CFO, validated the findings, noting the “encouraging sign” that sublease space has decreased over the recent months. Vornado completed 12 office leases totaling 208,000 square feet during the first quarter of 2021, he said.

“Almost 600,000 square feet of sublease space has been removed from the market by occupiers who plan to reoccupy the space,” Franco said. “Moreover, a substantial portion of the sublease inventory is challenged space, either physically, by way of the over tenant having poor credit quality or turn constrained, roughly a one-fourths of the sublease space in the market today has less than three years of term.”

The data provides additional insight into the lingering questions of just what, exactly, a post-COVID workplace will look like. Some experts contend demand will be permanently changed by the pandemic.

“As we approach a more complete economic recovery, there is a reassessment underway among all companies on what the workplace will look like,” Robert Sammons, senior director of research for Northern California and Northwest at Cushman & Wakefield, told GlobeSt.com in an earlier interview. “Will there be a significantly larger work-from-anywhere contingent? How much space will the company need and where should it be? And how will it be designed? The post-pandemic world will likely bring on new concepts of working with a more agile workforce but one that requires companies to continue to occupy office space.”