Sublease space available in North Texas now tops the 9 million square feet mark – what is going on here? Clearly this is being driven by office tenants being required to go home and then finding out that they really can work remotely. Guess we can call it pandemic subletting! And yes, while working remotely is driving part of the decision, reducing overhead costs is the other part. With COVID, employers need to cut expenses to stay in business and with CRE (commercial real estate) usually the 2nd largest expense to a business owner (behind personnel-payroll & benefits) it’s important to reduce that office footprint or eliminate it all together.
Available sublease space has increased by almost 50% just since January. That means we now have 9.2 million square feet of sublease space available, nearly 4.4 million of it vacant. Subleases make up 15-20% of all space available in North Texas today. Nationally, the total available sublease space stands at 180 million square feet.
So who is putting all this space on the sublet market? Actually, it’s a broad cross-section of the economy. Yes, there are lots of small companies doing it, but there are also giant national and international companies doing it as well. Uber has 102,000 square feet for sublease in a brand-new building in Deep Ellum (Dallas). Michaels Stores has 300,000 square feet for sublease in Las Colinas (Irving). If you need more than 100,000 square feet to sublease, you have eleven options in DFW. If you need 200,000 square feet, you have four options. And if you want 300,000 square feet, you have two options. And that’s just sublease space. If you throw in direct space from the landlords, the number of options is many times that.
How are landlords handling all this? Some are being very cooperative because they know it’s better to have someone in the space who may want to stay there when the sublease ends than to leave it vacant because the primary tenant definitely won’t renew. Other landlords are being more difficult because they have a lot of space to lease themselves so they don’t want the competition from subleases in their own buildings. And yes, a landlord can stop a sublease. They have the right to reject the lease for a multitude of reasons.
Subleases, in DFW right now, according to CoStar are averaging 15.5% less in asking rents than direct leases. We typically find that there is more negotiating room in a sublease than a direct lease, so sublease rates are likely even lower in the end. CoStar also predicts that lower rents will stay through the end of 2021 and then begin to turn back up. We think it may be a bit longer than that – through 2022.
The good news here is that DFW is one of the top markets in employees returning to the office-with as many as 40%. Will we get through this, absolutely yes. When, well, I’ll need to dust off my crystal ball for that.
Bob Gibbons is a Real Estate Advisor & Tenant Advocate (also known as a tenant rep) 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.