Office Sublease Vacancy Drops For 3rd Straight Quarter

The office sublease market has continued to thin, with vacancy declining for a third consecutive quarter and edging down to 3% of existing sublease inventory, JLL said in its Q2 2024 Market Dynamics report. Office sublease vacancy fell to 144 million square feet.

“Higher-quality subleases have attracted new tenants quickly,” JLL added. “More than 75% of the subleases signed in the second quarter were listed in 2023 or 2024, despite comprising roughly 40% of all sublease availability.”

Sublease absorptions reached their highest level since the pandemic with 5.8 million square feet of subleases signed, while the level of new sublease inventory coming on the market has dropped by a third compared to the first half of 2023.

Spec suites, other kinds of pre-built spaces, and high-quality sublease listings “are leasing quickly as tenants seek to avoid upfront costs,” JLL noted. That same dynamic, tenants “prioritizing low-capital options when committing to space,” drove renewals and extensions.

In fact, taken together, renewals, extensions and subleases comprised nearly two-thirds of office leasing volume over the last year.

AI,  Law Firm Tenants Drive Demand

JLL cited leases signed by an AI company and a law firm as examples of the types of tenants driving demand for high-quality sublease space, in particular.

On the heels of a $1 billion capital raise, Scale AI agreed to sublease 178,234 square feet of Airbnb’s former space in San Francisco, a move that enabled the firm to triple its footprint and upgrade to Class A space.

Covington & Burling agreed to sublease 235,000 square feet of WarnerMedia’s space at 30 Hudson Yards in Manhattan, a transaction which enabled the law firm to increase its footprint by a third, and was an upgrade “into a trophy property,” JLL noted.

Even as the sublease market begins to thin, the overall office market continues to lose occupancy, as tenants downsize expiring leases.

JLL said it expects downsizing rates to slowly stabilize but persist over the medium term.

“Downsizing rates vary across industries, but within industries the largest tenants have been responsible for the most substantial space trimming,” JLL said.

“Downsizing tenants have typically been more aggressive in cutting footprints than expanding groups have been in adding space,” JLL added. “While only three firms expanded a location by more than 100,000 square feet in the second quarter, five firms cut their footprints by over 100,000 square feet.”