Sublease Office Sector Inventory Declined for First Time Since Pandemic Began
The North American sublease market may have finally peaked after several quarters of increasing inventory. This timing would match a similar path to previous recessions when sublease space increased for approximately two years before hitting its highest point and then receding.
In Q3 2021, sublease office space declined in more than 50% of North American markets, including 20 markets where sublease inventory dropped quarter-over-quarter (QoQ) by 100,000+ SF. Space declines were significantly stronger among the six U.S. gateway markets, which collectively saw inventory drop by 5.1%.
Businesses are Snapping Up Sublease Space at Reduced Rates
There have been some instances of businesses removing large chunks of their own sublease space from the market as they develop clearer workplace strategies for a post-COVID-19 return to office workforce. However, most of the decline in sublease space in Q3 was due to space being subleased to other companies.
Signing sublease space is attractive for many businesses given the current price discounts available. Across major markets, sublease space discounts off direct rents range anywhere from 10% to 50%. (Note: This does not account for increased direct lease concessions currently available.)
Additionally, given the uncertainty related to how more agile workforces may look in a few years, the shorter lease terms often required with a sublease are currently considered a benefit when historically shorter terms may have been seen as a downside.
CBD’s Share of Sublease Space
The pandemic more deeply impacted many Central Business Districts (CBDs), which led to less office usage and disproportionate increases in sublease over the past year-and-a-half. For example, 46% of North American sublease space added in 2020 was in CBD submarkets, even though CBDs account for only a third of total office space inventory.
The decline in sublease space, however, is being led by CBD submarkets. In Q3 2021, 83% of the decline in sublease inventory occurred in CBDs.