It’s no surprise that some companies are considering eliminating their offices in favor of a work-from-home strategy. If nothing else, the COVID crisis has proven that the technology exists for people to work from home. The jury is still out on whether they want to or whether they will be more efficient there.
But the sublease market is growing quickly. As of today, the dominant commercial real estate data provider, Costar, shows there are now 8,705,491 square feet (SF) of office space being marketed for sublease in the Dallas Fort Worth market. That’s 2.2% of the nearly 400 million SF of office space. That’s the highest it has been since the tech bust of the early 2000’s.
That means more than 2.4 million SF has become available for sublease just since the beginning of the year. And 1.8 million SF of that has been in the last quarter. That’s the highest in one quarter in history. The early 2000’s has two quarters each with over a million SF added to the sublease inventory.
What’s interesting is that almost 4 million SF of the space being marketed for sublease today is still occupied. That’s up considerably from the 2.8 million occupied but available for sublease at the beginning of the year.
What does all this mean? Most importantly, when you add in the fact of three consecutive quarters of negative absorption you have the certainty of falling rents. One of my clients recently received an offer to extend his lease at a rental rate $4.00 below the landlord’s quoted $30.00 rental rate. That’s a smart landlord. Grab every SF of occupancy you can now even if you have to drop your rates 10-15% or more. It will likely be worse in the near future.
So why are companies putting their space up for sublease? It’s not totally clear and is likely due to a combination of factors. Based on what I’ve seen from my own clients and from discussions with other tenant representatives throughout the country, I suspect it falls into four categories.
First, companies which are closing their offices in favor of work-from-home and, therefore, have put their space up for sublease.
Second, companies implementing a hybrid model with some employees working from the office and others working from home. These will attempt to sublease only a portion of their offices or even entertain an office-sharing arrangement with another company. Office-sharing can be successful, but it requires much more thought and discussion to make sure the cultures of the two companies can coexist peacefully. For example, CPA’s and financial advisors may get along great. But add a tech startup to that mix and pandemonium will likely ensue.
Third, companies consolidating into fewer offices will try to sublease offices no longer needed.
Fourth, believe it or not, there are companies that are actually growing during the pandemic. They may move into larger offices and attempt to sublease the smaller space left behind. We should all be so lucky, right?
There could be a fifth reason – general pessimism of returning to the office. So why not try subleasing to see if it happens? There is nothing to lose by putting space on the sublease market and no cost, so some companies are basically tire-kicking.
The bad news is that there is no demand for office space right now. I have 3 office subleases available and the phone is not ringing. All 3 have generated a total of 3 inquiries and one has a showing scheduled for later this week. I’m hearing the same from other brokers.
- Sublease space will continue to come to market
- Little of it will actually get subleased
- Rental rates will fall
- Concessions (free rent & construction) will rise as landlords feel the pain
My advice for tenants:
- Delay decisions on long-term leases, if possible.
- Ask for a one-year extension. Don’t lock in a high rate when the landlord has yet to feel much pain.
- If you must do a long-term lease, get a termination option in 2-3 years even if it requires a termination fee. That termination fee may be lower than the savings of a renegotiated lease at that time.
- Consider subleasing someone else’s space at a huge discount. Subleases often come with furniture and shorter terms.
I wish you the best in this bizarre time. We’ll get through this eventually.
Bob Gibbons is a Real Estate Advisor & Tenant Advocate with REATA Commercial Realty, Inc. which is a tenant advisory firm based in Plano, Texas. Bob serves companies in Plano, Frisco, McKinney, Allen, Richardson, Addison, Dallas and the surrounding areas and specializes in companies which lease or buy office and warehouse properties.