Report: North American Sublease Inventory Declines for First Time Since Pandemic Began

Cushman & Wakefield, San Diego, Orange County, San Francisco, Seattle
Courtesy Laura Davidson

By Meghan Hall

As the pandemic hit and companies shuttered their offices, many businesses made the decision to throw their space on the sublease market in the hopes to offload or offset their cost of unused commercial real estate. The result was an influx of sublease space on the North American sublease market, and over the past 18 months its levels have been one of the most closely watched metrics by those in the industry. During the third quarter of the year, however, sublease inventory declined for the first time after peaking during the second quarter of 2021. According to a report by Cushman & Wakefield, the trend is widespread, which bodes well for the national office market.

While there is a long way to go, the sublease market’s regional trajectory is on par with previous economic cycles. 

“Although total sublease space has fallen, there is still a significant amount of space in the market,” explained David C. Smith, Cushman & Wakefield’s head of global occupier insights. “In Q3 2021, there [were] 35 North American markets with one million-plus of office sublease vacancy and 22 different markets with two million-plus. In the Great Financial Crisis, we saw a similar number of markets hitting the one million-plus square foot threshold, but only 10 surpassed two million square feet.”

Currently, there is about 145.1 million square feet on the sublease market, down from 146.3 million square feet in the previous quarter, marking a decline of 0.8 percent. The amount of sublease space declined more than 50 percent across the United States, including 20 markets where sublease inventory declined by 100,000 square feet or more. Many major gateway markets, including West Coast hubs like San Mateo County and San Francisco, saw their inventories fall significantly. San Francisco, New York and Boston collectivity saw their inventory decline by 5.1 percent, according to Cushman & Wakefield.

San Francisco saw one of the largest declines nationwide in its sublease space, with more than one million square feet pulled off the market. Oakland followed behind with an inventory drop of 536,118 square feet. Seattle and San Mateo County also saw declines in vacant sublease inventory of 275,498 square feet and 238,975 square feet, respectively. 

Several Southern California markets saw their sublease inventory decline as well. San Diego saw its sublease inventory decrease by 143,564 square feet, while Orange County saw its vacant sublease inventory shrink by 119,036 square feet.

Relative to total inventory, vacant sublease inventory in the United States accounts for two percent of total office inventory in 35 markets. Six U.S. gateway markets, including San Francisco, have 45 million square feet of sublease space, which is about 3.5 percent of third quarter 2021 office inventory.

Additionally, 83 percent of the decline in sublease inventory this past quarter has occurred in central business districts. That change in U.S. gateway markets was double the North American average, with a third quarter drop of 64 basis points to 58.2 percent. The change is important to note because in 2020, 49 percent of new sublease space was added in central business districts.

There are a few reasons why sublease inventory has begun to decline. First, some occupiers may elect to pull their space off the market in the hopes of returning to the office. However–and more significantly–according to Cushman & Wakefield, is occupiers signing leases for sublease space at reduced rates.

“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,” said Smith. “However, most of the decline in sublease space in Q3 is due to subleases being signed with new occupiers.”

Cushman & Wakefield states in its report that price discounts are driving companies to take space, especially in historically competitive markets where rates are high. Sublease space discounts in major markets offer discounts anywhere from 10 to 50 percent, not including increased direct lease concessions. These short-term leases are often desirable because they provide more flexibility as the office market continues to evolve post-COVID-19.

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