For the first time since the first quarter of 2013, the amount of sublease space in the Puget Sound region has exceeded two million square feet, according to a report by brokerage group CBRE. As of the fourth quarter of 2016, 2,009,128 square feet of sublease space was available in the commercial office market across King, Snohomish and Pierce Counties. But experts say an increase in available sublease space isn’t necessarily a sign of a market-wide slowdown.
Sublease space becomes available for any number of reasons. At times, it can be attributed to a slowing tenant demand but at other times it can be a sign of growth. “People often misperceive what a sublease indicates,” said Owen Rice, senior vice president at CBRE in its Seattle office. “Sometimes, yes, it may be that a company is downsizing for a variety of reasons, but oftentimes it’s the inverse, it’s that they’re growing, and [right now] I think it’s the latter,” he said.
it’s healthy to have some sublease space in the market
Rice said he’s seeing many cases right now where clients are subleasing their space as a result of their growth and a lack of available space. “Maybe there wasn’t anything available in the building or adjacent to the building they were occupying at the time, so they made the decision to vacate the premises and move to a location that could accommodate their growth and subsequently, are disposing of their space,” said Rice.
Sublease space is often priced based on the remaining term, allowing for discounted leasing rates. Sometimes what happens, Rice said, is that company knows they are going to expand in the future, so they don’t want to lock themselves into another lease in the meantime. Subleases provide them the opportunity to continue to operate until they’re able to expand.
But every company has its own real estate strategy, some preferring shorter terms and more flexibility, which can be often be accommodated through subleases, whereas other tenants prefer longer terms. Generally speaking, Rice said the market is absorbing a sublease location in about 90 days or less, but that depends on how aggressive the client wants to be with the space. A less aggressive client could have sublease space on the market anywhere from six to nine months. “How important is it for us to dispose of this space for our client? If it’s incredibly important, we’re going to price it really aggressively, meaning inexpensively,” Rice said.
Even though the Puget Sound is seeing sublease availability at 1.9 percent of the total market, it’s still down from the first quarter of 2010 when the region experienced 2.6 percent availability, according to CBRE’s numbers. Overall, 2010 was a high-water mark for sublease space, with every quarter hitting well over two million square feet of available sublease space. The most availability came out of the third quarter of 2010, with 2,666,702 square feet or roughly 2.8 percent of the total market. 2011 and 2012 also followed suit, with each quarter surpassing two million available square feet. But the turn came in the second quarter of 2013, when the amount of available space dropped from 2,012,900 square feet of availability, or 2.1 percent, to 1,602,099 square feet, or 1.6 percent.
A recent report from JLL, titled How Seattle tenants are saving $6/RSF on their rent: Subleases, detailed the going rates for sublease space in Seattle. According to JLL, sublease rates are averaging $31.80 per square foot. In comparison, direct rates are averaging $38.01 per square foot, according to the analysis.
While it looked like 2016 was a great year for companies looking to sublease space, some of it had been consumed. In both the first and second quarters of 2016, roughly 1.5 million square feet was available for sublease, which is the lowest availability since the first quarter of 2010, according to CBRE.
According to a fourth quarter of 2016 report from a brokerage group in Seattle that tracks sublease space and that wished to remain anonymous, the largest estimate of available spaces in Seattle comes from the Russell Investment Center, which is offering up 133,145 square feet. The second largest is 1441 N. 34th St. by Lake Union in Fremont, which has 57,944 square feet available. There were fourteen blocks larger than 20,000 square feet; six of those properties were over 30,000 square feet and the others were under that anywhere from 22,000 to 27,000 square feet. The majority of sublease space, roughly 84 percent, came online in the past 12 months.
The same report counted 778,327 square feet available in Bellevue, up from 366,141 in the fourth quarter of 2015. Bellevue Technology Center, the largest block of space, is estimated to offer 67,378 square feet. The Plaza Center in Bellevue CBD is also marketing 39,500 square feet. Aside from these two larger subleases, everything else in the Bellevue market ranges between 20,000 and 34,000 square feet. Similar to Seattle, 82 percent of all the available space in Bellevue came online in the last 12 months.
“In any market, it’s healthy to have some sublease space in the market because it provides solutions to clients that may otherwise not fit the need for going direct to landlord,” Rice said.