Companies are dumping record volumes of office space on to the sublease market, flashing a potential warning sign over the long-term health of the office properties that comprise the biggest chunk of US real estate.
The amount of sublease inventory in many US markets is at or exceeding levels reached in the aftermath of both the dotcom bust and the 2008 financial crisis, according to brokers, with expectations that it will expand further.
That development — coupled with a flurry of recent announcements from companies such as Bank of America and SalesForce that they will require less office space as more employees work from home — is leading some analysts to conclude that the damage to the office market wrought by the coronavirus pandemic will not be fully repaired even when the economy heals.
“The nation just underwent what will end up being close to a year-long work-from-home experiment and the results continue to show for themselves. You have a company every other week saying how successful work-from-home has been for them, and their plans to reduce or shrink their total office space needs,” said Daniel Ismail, the office analyst at Green Street Advisors, a real estate research firm.
Mr Ismail believes that demand for office space could be down 10 to 15 per cent even after the economy recovers, with rents in large US cities like New York and San Francisco taking an even greater hit. Changes in work habits that Green Street expected to unfold over four to five years were instead happening in a matter of months. “We’re turning on a dime,” Mr Ismail said.
Office owners have been somewhat cushioned from the pandemic’s economic blow because their tenants are generally signed to long-term leases. New leasing activity has largely been put on hold. Still, some recent transactions have provided a glimpse into the market’s weakness.
SL Green, which recently cut the tape on one of the city’s most ambitious office towers, the $3bn One Vanderbilt, beside Grand Central Station, told analysts this month that its asking rents were down 5 to 10 per cent. It is also having to grant prospective tenants more generous concessions, such as covering remodelling costs, the developer said.
Brokers’ data on sublease space tends to vary. But all report sharp increases in major US markets over the past year.
In New York City, by far the largest office market, Cushman & Wakefield estimated that subleasing space was just shy of 18m square feet as of November. That was an all-time high, and up from 10.5m square feet the previous November.
Savills estimated that Manhattan sublease space had swelled to 16.1m square feet by the end of the third quarter, up 46.8 per cent from the beginning of the year, and nearing the all-time high of 16.3m square feet recorded in 2009.
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