September 8th, 2007
Report: sublease space threatens office markets
Roughly one quarter of all vacant office space nationwide–and nearly 40% of available office stock here in New York City–is sublease space. This excess is plaguing many U.S office markets, shows a report from Grubb & Ellis and PNC Real Estate Finance.
There is approximately 142 million SF of empty sublease space from coast to coast. The total in New York City is 12.7 million SF. Downtown’s sublease rate is 36.5% and the rates in Midtown and Midtown South are 38.8% and 44.6% respectively, according to the report.
“Our research suggests that there will be a race over the next three years between any market recovery and the rate at which sublease space expires and returns to the market. Sublease space would delay but not reverse a market recovery,” said Bob Bach, Grubb & Ellis’ national director of market analysis.
The report showed a “slight decline” in sublease space during the second quarter of this year. But the decline was tempered by an already huge inventory of sublease space that seems to be growing by the week. Corporate downsizing is adding to the problem, throwing vast chunks of sublease space onto an already-glutted market.
Landlords, reads the report, are closely monitoring the sublease volume within their portfolios as well as the volume within other markets and individual buildings. Perhaps more than ever, landlords are “acutely aware of the possible impact of too much sublease space coming onto the market,” according to the report.
In one sense, landlords can afford not to lose sleep over the sublease glut–they are still getting rent checks every month from their direct tenants. It doesn’t matter if the space being leased is empty.
“For the most part, these leases were signed with credit tenants who have continued to pay their rent obligations so landlords haven’t yet felt any significant pain,” said Nick Buss, vice president of market research for PNC Real Estate Finance.
Landlords are hoping that the overall economy improves before these leases expire and the space suddenly becomes their problem, said Buss.
The authors of the report do not see - the economy “achieving balance” until 2005 at the earliest.
The report also confirms that information companies accounted for 42% of all sublease space now in the market.
“It should come as no surprise that technology, telecom and dot-com markets like-Austin, Boston, San Jose, San Francisco and Seattle are the most heavily exposed to sublease space,” said Bach.
On the flipside, Bach credited markets such as Pittsburgh, Miami, Orlando and tampa as dodging the sublease bullet by shirking the false promises of a “new economy.”
The report also found that Class distinctions are apparent between property types. Class A space accounts for 62% of the total, nationwide sublease space. The total for B and C space (combined) is much lower-38%. The reason for the discrepancy between property types is that Class A tenants have been more susceptible to downsizing, per the report. Also, the “space grab” of 1999 and 2000 dealt mainly with the Class A market.