Sublease Space Sum Falls in North America for First Time Since COVID

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The amount of available sublease space in North America has declined for the first time since the onset of the pandemic, but there’s still plenty of it on the market, according to a new report from Cushman & Wakefield.

Available sublease space peaked in the second quarter of this year at 132.4 million square feet, but fell to 130.4 million square feet in the third quarter, the report found. That bucks the trend of it consistently rising since 2019 as large occupiers dumped hundreds of thousands of square feet on the market when the pandemic forced office staffers to work from their homes. 

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“We’ve seen some instances of occupiers removing large chunks of their own sublease space from the market as they develop clearer workplace strategies for a post-COVID-19 workforce,” David Smith, C&W’s head of global occupier insights, said in a statement. “However, most of the decline in sublease space in Q3 is due to subleases being signed with new occupiers.”

Sublease space is attractive for companies looking for a rent discount of anywhere from 10 to 50 percent depending on the building, and often carry shorter leases helpful for firms still unsure of where their staffers will be working in the next few years, Smith added. 

Real estate brokers have been feeling the tighter sublease market, with less supply around as companies snap up space or withdraw ones up for lease, said CBRE’s Adam Foster, who recently brokered a 23,000-square-foot sublease deal for AKF Group.

“People are hiring again, and people are saying, ‘I’ve got to hold on to this space, because I’m going to be re-occupying it, maybe a little bit differently than I was before, but I’m not willing to shed all that space and come up short,’” Foster told Commercial Observer. “Year to date, 26 percent of leasing has taken place in sublets … The pandemic five-year average was under 18 percent.”

Also, companies might be encouraged to invest in a pre-built sublease space now, because building out an office space could take more time due to slowdowns in construction and supply-chain issues, Foster said.

But it’s not all sunshine and roses — a significant amount of sublease space still remains on the market. In the third quarter, 35 North American markets had more than 1 million square feet of office sublease space available while another 22 markets had more than 2 million square feet available, Smith said. In the global financial crisis of 2007-2009, only 10 markets surpassed the 2 million-square-foot threshold, he added.

Still, the recent decline in sublease space is being led by central business districts (CBDs)— areas where office space was hardest hit by the shift to working from home. About 83 percent of the drop in available sublease space occurred in CBDs, according to the C&W report.

The current decline is in stark contrast to the surge in sublease space seen during the pandemic, which hugely impacted CBDs as about 46 percent of North American sublease space put on the market in 2020 was located there, even though they only account for one-third of total office space, according to C&W.

Manhattan saw the highest drop in available sublease space from the second to the third quarter, with 1.3 million square feet taken off the market. San Francisco was second, with a drop of 1 million square feet.

“The greatest declines in sublease availabilities are in and around gateway markets — which were initially more negatively impacted by the pandemic,” Smith said in a statement. “[The North American sublease market] appears to at least have stopped growing, which is good news.”

Celia Young can be reached at cyoung@commercialobserver.com.