Tuesday, October 20, 2020

Sublease Availability Hits Record Level in US

 By Michael Roessle CoStar Analytics

While the U.S. office market had been resilient at the outset of the pandemic, cracks have emerged.

The amount of available sublet space on the market rose considerably midyear and further accelerated in the third quarter. Prior to the second and third quarters of this year, the supply of U.S. sublet space has been generally stable, varying between roughly 100 million square feet and 110 million square feet over the past decade. The 156 million square feet of available sublet space now on the market is a record high and represents an increase of 40 million square feet from the end of 2019.

The questions surrounding the future of the economic recovery and the course of the pandemic create uncertainty for many tenants regarding their own finances and future space needs. As office leases tend to be longer term, firms looking to cut real estate costs have relatively few options. One is to sublet either part, or all, of their current office space to recoup at least some of the cost — and office occupiers are increasingly attempting to do that.

Whether or not there will be many tenants interested in subleasing this space remains doubtful, as demand in the office sector during the third quarter plummeted to its lowest level since the dot-com bust following a weak midyear result. Demand forecasts for the fourth quarter don’t show a rebound, so this excess space may linger on the market for some time, even at a discounted rent.

Areas of the country that some felt were best able to weather a downturn with a temporary transition to working from home are the same areas seeing sharp increases in sublet space.

Tech hubs such as San Francisco and Austin, Texas, have seen the amount of sublet space on the market double since the end of last year. Retail and hospitality focused tech firms have felt the brunt of the shutdowns in those industries. Uber, Airbnb and Yelp have all laid off a significant number of employees in the San Francisco Bay Area. More than 68,000 square feet formerly occupied by KeepTruckin and Yelp has recently been offered for sublease at 55 Hawthorne St. in San Francisco.

Seattle and San Jose, California, have also seen 50% increases in sublet availability. Software firm SAP Concur put its 100,000-square-foot headquarters at Key Center on the market for sublease in Bellevue, an area that was arguably the hottest in the entire Seattle market.

Though Chicago is not a purely tech-centric market, Groupon plans to lay off more than 40% of its employees and is trying to sublease 150,000 square feet of its office space at 600 W. Chicago Ave. Additionally, restaurant software supplier Toast is looking to offload roughly half of its 50,000-square-foot space at 515 N. State St.

There is concern that these markets would suffer more than others should more office occupiers opt to permanently reduce footprints. All of the aforementioned areas of the country have a robust supply pipeline, totaling a combined 37 million square feet. About 42%, or 15 million square feet, remains available for lease in those projects. At the same time, these markets have seen the amount of available sublease rise by nearly 14 million square feet combined since the end of 2019, putting more stress on the availability rate.

Should more companies face financial distress or decide to shift part, or all, of their employees to a permanent remote-work situation, the recent flood of sublease space may be a harbinger for a tsunami that is gathering strength.


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