Available Sublease Space in US Office Market May Have Peaked

The availability of sublease space in the US office market appears to have peaked, with the market reaching what Cushman & Wakefield economists say is an inflection point.

There was 130 million square feet of vacant sublease space as of the third quarter, a figure that translates into 13.4% of total vacant space in the US. That’s also a decline of 2 million square feet over last quarter, a welcome decrease after seven straight quarters of increasing inventory.

“This timing would match a similar path to the previous two recessions when sublease space increased for approximately two years before hitting its highest point and then receding,” Cushman analysts note in a recent report, and adding that vacant sublease space feel quarter-over-quarter in more than half of the 86 US markets they tracked. That includes 20 markets where sublease inventory dropped by more than 100,000 square feet.

Markets with the largest quarter-over-quarter decline include Manhattan (1.3 msf), San Francisco (1.0 msf), Oakland/East Bay (0.5 msf), Austin (0.5 msf), Charleston (0.4 msf) and Boston (0.4 msf).

Most of the declines last quarter were the result of new tenants taking sublease space, according to Cushman.

“Acquiring sublease space is attractive for many occupiers given current pricing—across major markets, sublease space discounts off direct rents range anywhere from 10% to 50%,” the report states, noting that those numbers don’t account for increased direct lease concessions that are currently available. “Additionally, given the uncertainty around the future of the agile workplace and hybrid work models, many office occupiers are viewing the shorter lease terms often required with a sublease as a benefit when historically they may have considered the shorter terms as a downside.”

One Tech Solution 

Some owners are now turning to technology to fill sublease space, in an attempt to find creative ways to lease the glut of sublease space that remains on the market. Earlier this fall, Alpha Lease Management CEO Phil Raglin told GlobeSt.com that the sublease market will be a “new normal” in commercial real estate.

“We believe that subleasing is here to stay, particularly in light of companies’ shifting space needs as a result of the pandemic. That said, there are creative ways to sublease that benefit owners greatly and reduce the burden of vacancy,” Raglin said, citing his company’s Tenancy on Demand program, which helps owners manage and sublease vacant space. 

“Landlords pay an agreed-upon fee and are in return guaranteed a stable long-term tenant with the expertise to operate the space and add deep value,” Raglin said. “This type of partnership also takes the risk out of each space because we guarantee the long-term lease, which leads to an immediate increase in NOI. The sublease arrangement delivers flexibility to the owner or investor to recapitalize, reposition, or otherwise reinvest the asset.”