By Meghan Hall
The rise of the coronavirus has caused a dramatic uptick in sublease availability as companies put the brakes on their leasing activity while posting their own offices to the market. A recent report released by Cushman & Wakefield shows that throughout 2020, sublease space increased by 80 percent across 83 North American markets. Even into 2021, the amount of sublease space on the market has continued to rise, albeit at a slightly slower rate. However, Cushman & Wakefield notes that tenants are beginning to “shake off the cobwebs” as they once again begin to consider re-entering the market.
“In the wake of the global economic and health disruption, occupiers remain cautious with major real estate decisions,” said David Smith, Cushman & Wakefield’s Head of Occupier Insights, Global Research. “This has continued to drive less overall leasing, more renewals, shorter terms – when possible – and strategic subleasing considerations of excess space. While there continues to be uncertainty primarily due to health concerns stalling long-term decisions by occupiers, the roll out of vaccines and improving business sentiment should lead to more activity in 2021.”
The amount of North American sublease space on the market has grown from 68.9 million square feet to 124.2 million square feet, a change that was underway even prior to the pandemic, notes Cushman & Wakefield’s Senior Director of Bay Area Research, Robert Sammons. The brokerage firm initially noticed that sublease space was on the rise in San Francisco by the end of 2019. At the time, Uber was relocating its headquarters to Mission Bay, Credit Karma was moving its headquarters to Oakland, and Stripe announced its intentions to relocate to South San Francisco.
Initially, stated Sammons, the uptick in sublease space in San Francisco was thought of as a boon for an already ultra-competitive market.
“The market had been incredibly tight; it had the lowest major market vacancy rate in the United States,” explained Sammons. “It seemed to be that the market was loosening up a little bit, which was a good thing for San Francisco because we were pushing tenants out of the city because of the lack of available space…At that point, we looked back and thought this was good.”
Soon, other markets, like New York, began to follow suit towards the end of the first quarter of 2020. As the pandemic and work from home policies took hold, companies sought to avoid making major real estate decisions. However, many tenants took the opportunity to place space on the market–even for the short-term–in an effort to mitigate some of their costs.
Currently, the amount of sublease space on the market in the United States is 25.8 percent higher than at the height of the 2008-2009 Great Financial Crisis, accounting for 2.1 percent of the total office market. On a more positive note, in terms of both numbers and percentage of total inventory, the amount of sublease space remained lower than the Dot-Com Recession peak, which saw 124 million square feet of sublease space hit the market by 2002.
“It was really the fact that these tenants were wondering when they could reoccupy their space and how much they might need in some post pandemic world,” said Sammons of the changes in the office market during 2020. “And then working off site came into play, and it was working out much better than anyone expected, too.”
Over the past year, 13 markets recorded an increase of sublease space of greater than 200 percent. San Francisco topped the list, with its amount of sublease space increasing by 587 percent. Other tech-centric markets, including Seattle, saw its sublease space increase by 307 percent. The Puget Sound’s Eastside increased by 262 percent.
For markets like the Bay Area and Puget Sound, the correlation between increasing sublease rates, work from home and big tech firms is not entirely surprising.
“[San Francisco and Seattle] are both tech markets, and that’s where the growth has been over the past decade, really,” said Sammons. “It is a factor that these tech companies are wanting to be in a more mixed-use environment…and that’s generally within the central business districts of major cities.”
Out of any of the markets evaluated, San Francisco had the largest proportion of sublease space when compared to its overall market. At the end of the year, more than half of all vacancies in the City were attributable to sublease, and it was the only market studied that had more sublease vacancy than direct vacancy. San Mateo County and the Puget Sound’s Eastside markets were next in line, with sublease vacancy accounting for more than 30 percent of all office vacancy in each market. In Silicon Valley and Oakland, sublease space accounted for about a quarter of office vacancy. The Seattle metro followed closely behind, sitting at about 23 percent.
However, while headlines have focused on how hard core markets have been hit as sublease space has flooded the market, nationwide, the majority of sublease availability is located in the suburbs. North America’s suburbs accounted for 56 percent of sublease vacancy, whereas central business districts accounted for 44 percent. Cushman & Wakefield notes that sublease space in core downtown areas increased faster in 2020, spiking by 99 percent. By comparison, non-central business district submarkets increased by 68 percent.
On a brighter note, Cushman & Wakefield believes that the rapid increase of sublease inventory has peaked. The brokerage firm noted that by the fourth quarter of 2020, the increase in sublease vacancy had slowed, while tenant requirements continue to increase. Sammons added that the timing is ideal for tenants looking to secure office space with a lower asking or effective rent. In San Francisco alone, Cushman & Wakefield is now tracking 4.5 million square feet of requirements, compared with just three million square feet during the second and third quarters of 2020.
Sammons is hopeful, believing that once companies move on from the psychological roadblock of returning to the office, activity will pick up.. “Look for the green shoots,” he said.