Industrial Sublease Space Ticks Up As Demand Moderates

Sublease space is on the rise for the industrial sector, including some inventory that’s been listed in facilities still under construction.

In addition, an elevated number of spaces greater than 200,000 square feet have been added to the market in recent months, according to Colliers research. The firm’s Amanda Ortiz notes in a new research brief that the amount of available sublease space has risen by nearly 46% since the start of 2022 and is expected to continue to increase this year as occupiers continue to reevaluate space needs.

“Occupiers may have overestimated the amount of space needed to satisfy a just-in-case inventory strategy,” Ortiz says. “Inventory control is beginning to backpedal to fewer days in the warehouse, which could impact industrial demand. As a result, the just-in-case strategy will remain an industrial driver, but companies will utilize less space than previously expected. The excess of space leased during the pandemic seems no longer necessary for some occupiers.

Ortiz notes that manufacturing companies have given back the most space over the last 12 months: space held by those tenants accounts for 27.4% of newly available sublease space on the market.  In addition, retailers and e-commerce companies have added “considerable space” to the market, including outdoor recreation company Coleman’s 1.1-million-square-foot distribution center in the Kansas City market.

Much of the available space is listed in facilities still under construction, Ortiz says, in a trend that suggests pre-leased space is likely already being given back to the market in cities like Atlanta, the Inland Empire, and northern New Jersey.

“With the full pipeline of projects yet to be delivered, overall vacancy will likely increase as new space and additional sublet space is added to the market in the coming year,” Ortiz says. “However, it’s important to remember that although industrial demand is decelerating, occupancy gains remain well-above pre-pandemic levels. While it may seem like a sharp drop in demand, large occupiers including major retailers, 3PL companies, and food and beverage companies will continue to expand in 2023. Thus, the industrial downturn should be temporary, and the industrial sector will remain a desired asset for occupiers and investors alike.”