Sublease Additions Slow in Manhattan as Companies Pull Space Off Market: CBRE

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The amount of Manhattan office space available for sublease has started to drop, as companies pull blocks off the market in an indication that the city’s commercial real estate woes might be nearing an end, according to a recent CBRE report.

Two million square feet of sublease space has been withdrawn from the market so far this year, with more than half that occurring in the last two months, the report found. And 60 percent of that space, sized at 25,000 square feet or larger, has been recaptured for re-occupancy by the original tenant, which the report attributes to nearing a return to office work for many companies. 

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“As companies bring more workers back to the office — most for the majority of the workweek — sublease offerings are being trimmed or withdrawn altogether,” the report said. “There is still a long way to go … but with the volume of new additions slowing down, the pace of space withdrawals picking up, and the economy adding back office-using jobs at a steady clip — there is more cause for optimism that the office market is nearing the beginning of the end of its downturn.”

Today’s sublease market mirrors that of the years following the recovery from the 2008 financial crisis, which saw sublease space shrink as more companies withdrew from the market. 

Less space available for sublease could indicate a turnaround for New York’s real estate market, but it’s still very early in the recovery process, Mike Slattery, an associate field research director for CBRE, told Commercial Observer. The 2008 downturn, which was caused by issues within the market rather than outside of it, is significantly different from the pandemic.

“We’re just at the infancy of the recovery regarding sublease space,” Slattery said.

A glut of sublease space lowers overall office rents, as sublessors often discount their spaces compared with direct space offerings. A glut also drives up the overall market’s availability rate, according to the report.

“It seems like a positive indicator, given we’ve seen a lot of tenant activity in the market,” Slattery said. “[The first quarter of 2021] was the best quarter of leasing during the pandemic period. It seems like things are, if they haven’t turned a corner, they’re on their way.”

About 19.3 million square feet of gross sublease space has been added to the Manhattan office market since the beginning of 2020, according to CBRE. As of this month, sublease space accounts for 26 percent of all available space, still above the 25 percent level experts point to as a “glut” of it

That’s less than the amount of sublease space added during the 2008 financial crisis, which saw 23.7 million square feet of gross space added from 2008 to 2009 and accounted for nearly one-third of available space in the market at that time. 

Even though the majority of sublease withdrawals this year were from companies pulling space off the market, not everyone is likely to come back to the office right away. A recent survey found that 1 in 3 Manhattan workers don’t plan to return to the office by Labor Day. For those 62 percent expected back, they will only be in for three days a week.