National Sublease Supply Declines for First Month Since Pandemic

National Sublease Supply Declines for First Month Since Pandemic

After increasing by nearly 78% since the COVID-19 pandemic began in March 2020, the sublease supply across the U.S.¹ fell for the first time in August (-1.5%). While the office market remains burdened by 160 million sq. ft. of sublease space, monthly growth has slowed since last summer and supply may have finally hit its peak.

Figure 1: National Sublease Supply Index & Growth

Note: Sublease supply for 53 markets is indexed as of March 2020 to 100.
Source: CBRE Research, Q3 2021.

Quarterly Sublease Space Additions Slow

Occupiers are putting significantly less space on the market than they did last summer. Quarterly additions to the sublease inventory fell by 62% in Q2 2021 compared with Q3 2020. This trend is expected to continue in the second half of 2021.

Figure 2: Gross Sublease Additions for Select Markets

Note: Data is from eight select markets, representing 43% of the sublease market, which track gross additions to sublease supply: Atlanta, Boston, Chicago, Los Angeles, Manhattan, Philadelphia, Seattle and Washington, D.C.
Source: CBRE Research, Q3 2021.

Sublease Supply Increasingly Leased or Reoccupied

While new additions to sublease supply have been dwindling, existing sublease space is also contracting through leasing or reoccupation. Withdrawals of sublease space by tenants are up 148% since Q2 2020. In Manhattan, 67% of withdrawals in H1 2021 were because the existing tenant reoccupied its space.

Preliminary data for Q3 2021 indicates that sublease activity represented more than 25% of all new leasing nationally, significantly higher than the average pre-pandemic level of 10%. For occupiers, sublease space currently presents a fiscally attractive option. Class A space in more expensive downtown areas can be obtained for a 10% to 15% discount over comparable direct space. This prime space is often already built out, eliminating the cost of tenant fit-outs.

Figure 3: Gross Removals by Type for Select Markets

Note: Data is from eight markets, representing 43% of the sublease market, which track gross removals of sublease supply: Atlanta, Boston, Chicago, Denver, Los Angeles, Manhattan, Philadelphia, and Seattle.
Source: CBRE Research, Q3 2021.

Looking Ahead

The U.S. office market may have seen the pandemic-era peak of sublease supply. Nearly 75% of markets are already past their peak level of sublease availability. Markets with a high concentration of sublease space, such as San Francisco, Seattle and Manhattan, are all seeing declines since peaking in Q1 and Q2 2021. New additions are not enough to offset sublease space that is being withdrawn or leased.

It is expected that sublease availability will continue to decline moderately through the second half of 2021 and into 2022.

¹ The CBRE Pulse of U.S. Office Demand, which tracks activity for the 12 largest markets, saw sublease space decline in July for the first time in the pandemic era.