Office Sublease Inventory Declines for Second Straight Quarter
North American sublease inventory trended down in the last two quarters of 2021, after seven quarters of increasing inventory. The timing matches a similar path to the previous two recessions when sublease space increased for approximately two years before hitting its high point and receding.
In Q4 2021, North American sublease inventory declined by -4.8% quarter-over-quarter (QoQ). Current inventory is 138.1 million square feet (msf), down from 145.1 msf in the previous quarter.
Sublease Inventory Drops Correlated with Leasing Activity
Total office leasing activity turned a corner in 2021 in the U.S. National leasing activity was up 13.3% year-over-year (YoY), and Q4 leasing was up 29% from Q4 2020. This demand is showing up in the sublease market.
Among the 20 markets with the largest declines in sublease inventory in Q4 2021, 15 had higher YoY leasing activity growth than the national average. And five of these markets had YoY leasing growth above 50% (Boston, San Mateo County, San Francisco, Austin and Miami).
Occupiers were much more active with office leasing in 2021, partially due to favorable effective rental rates, particularly in the sublease market. Additionally, given the uncertainty related to how more agile workforces may look in a few years, the shorter lease terms often required with a sublease are currently considered a benefit by some occupiers.
CBD’s Share of Sublease Space Continues to Decline
Relative to non-CBD submarkets, the pandemic more deeply impacted many Central Business Districts (CBDs), which led to less office usage and disproportionate increases in sublease over the past year-and-a-half. For example, 46% of North American sublease space added in 2020 was in CBD submarkets, even though CBDs account for only a third of total office space inventory.
It's not surprising then that most of the sublease space decline is occurring in CBDs–59% of the decline in Q4 2021, for example. The change among U.S. gateway markets was flat with a QoQ minimal increase in share of 6 bps (from 58.2% in Q3 to 58.3% in Q4).