Near-Record Sublease Space Indicative of Market Weakness

Colliers recently issued a profile of the Top 25 U.S. office markets, which observed that net absorption fell into negative territory for the first time in a decade and vacancy rates posted their sharpest increase over the same period. An example of the growing market weakness is the fact that the amount of sublease space is increasing towards a new record high. At mid-year, there were 139.1 million square feet of office sublease space available in the United States, just 4 million square feet shy of its previous peak in 2Q 2009.

Sublease space is particularly problematic because it is generally available at a significant discount to market rates. Colliers reports the current average discount to be 23% in the largest U.S. markets. For those of us who toil in government sector real estate, subleases have little direct impact since GSA and other federal tenants have lease requirements that effectively prevent them from becoming subtenants. Yet, the indirect impacts are more dire. Sublease space is a sure sign of market weakness and portends reduced rents and/or increased concessions in the direct-space market. This is where the impact on GSA leasing will be felt. Yet, some markets will fare better than others.

Take a look for yourself. You can download the report here.