Office Sublease Space Appears to Have Peaked

The office subleasing market may now be nearing its peak. While space continued to be added to the market in Q2 2021, it was at the slowest rate since the pandemic began.

In fact, the 5.9 percent increase is the lowest QoQ growth rate since Q3 2019, according to the Cushman & Wakefield in North American Office Sublease Space Mid-Year 2021 report.

The absolute amount of sublease inventory has surpassed the two previous recessions. However, as a percentage of total office inventory, the Q2 2021 total of U.S. sublease space still represents a smaller proportion of total office inventory than during the Dot-Com Recession (2.4 percent in Q2 2021 vs. 2.9 percent in Q2 2002).

As the pandemic negatively impacted North America in Q2 2020, companies began to put increasingly more space on the sublease market with activity peaking in Q3 2020 when 22.3 msf of space was added.

History shows that after the previous two recessions, sublease space increased for approximately two years, and Q2 2021 marked the seventh straight quarter of positive sublease space growth (dating back to Q4 2019).

Space Declined in Three Key Markets

Sublease space continues to be added to the market with total North American sublease space climbing to 147 million square feet (msf) after 8.8 msf of new space came online during Q2 2021.

Across 90 North American markets tracked by Cushman & Wakefield, office sublease space is up 76 percent year-over-year (YoY) and up 99 percent since the beginning of the pandemic in Q1 2020. In the United States, specifically, it is +74 percent YoY (+56.4 msf)

But space declined in and around three U.S. gateway markets: Washington, D.C. Metro; New York; and the San Francisco Bay area.

In the past year, there have been nine North American markets whose sublease inventory shrank YoY, with the most significant ones being Houston (-442,000 sf) and Washington, D.C. (-366,000 sf). Sublease space declined QoQ in nearly a third of North American markets, including 18 where sublease inventory dropped by 45,000+ sf.

The suburbs currently account for 57 percent of sublease vacancy while the remaining 43 percent is in CBD submarkets.