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How Sublease Activity Can Hint at What’s Next in CRE

Matt Heidelbaugh • 2/25/2020
In commercial real estate, subleases can be considered a leading indicator, hinting at what’s ahead in the market.

What's Next in CRE

We’ve all heard of a leading indicator, right? They aren’t negative or positive per se, but they often provide us with wisdom about what’s next.

Ask Google, and you’ll read this: “A leading indicator is any economic factor that changes before the rest of the economy begins to go in a particular direction. Leading indicators help market observers and policymakers predict significant changes in the economy.”

Over the years, it’s been my experience that subleases can be considered a leading indicator, hinting at what’s ahead in the commercial real estate market. Why? Because when there is job growth, the real estate industry also grows, which leads to acquisitions, with companies leasing more space. On the flip side, when companies downsize, it leads to dispositions, with companies giving up space, often in the form of subleases.

Of course, not all subleases are created equal—sometimes companies consolidate and grow, leaving behind excess space. But many times subleasing can be a harbinger of a slowdown as companies attempt to shed excess space, often due to employee layoffs. A quick survey of many submarkets around DFW shows an increase in sublease space, which, in turn, could mean a slowdown is on the horizon. 

During my career, I’ve experienced three real estate “cycles.” Each time, sublease activity increased steadily as the market slowed down. Just three years ago, good sublease space was very hard to find—especially space that we deem “plug and play,” with furniture, fixtures and equipment in place that allows a subtenant to occupy quickly. But today, in many DFW submarkets, ample sublease space is available in different shapes, sizes and conditions.

Of course, we shouldn’t panic yet! The good news is that many of these subleases are being gobbled up by robust leasing activity, something we all hope continues. No one has a crystal ball. I’m simply sending up a flare that increased sublease activity has been an early warning indicator in the past. Let’s hope it’s not the case this time. North Texas continues to be one of the best places to do business in the United States, with more than 300 people per day moving here. We have a strong, diversified economy, and I’m hopeful that our positive momentum will continue.

Let the good times roll…

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