• As noted in our last post, sublease space increased by nearly 900,000 SF in the second quarter. 
• At the peak of cycles, the rent discount for sublease space disappears. 
• In downturns, overall sublease rental rates have decreased faster than direct rental rates. 
• In the dot-com era, sublease rents fell by 46%, while direct space rents fell 38.6%, and in the Great Financial Crisis, sublease rents fell 31.9% and direct space rents 23.9%. 
• So far in this cycle, direct asking rents have held steady, while sublease rents have fallen 4.5% since the end of 2019. 
• We’re hearing that some sublease space is being held back. Once it hits the market, it will add to the rapidly increasing sublease inventory. Note that June was the biggest month for the market year-to-date for new sublease additions.  
• If history is any guide, the rent declines that come for direct space will be magnified in the sublease market. 

In our last post, we noted a marked increase in sublease space in the city of Boston. Today we look at how sublease rents have performed in down cycles. The short answer: it isn’t pretty. Performance is related to myriad factors, such as quality of space, term remaining on the lease, and leverage. The key differences when tenants work directly with landlords versus sub–landlords are the levers they can pull to get a deal done. A landlord can adjust term, free rent, and tenant improvement allowances before cutting face rent, while a sub–landlord cannot. While some sub–landlords will include tenant improvement allowances, generally speaking, their only real lever is rent. After all, the remaining term is what it is. 

In the past two cycles, we have seen a situation where at, or near, the peak of the cycle — here defined by the highest direct asking rent — the spread or discount of a sublease vs. a direct space lease evaporates. At the cycle’s peak, a tenant subleasing space can ask what the original lessee paid for the space. However, the tides change quickly when a downturn hits. When that happens, overall sublease rental rates have decreased faster than direct rental rates. In the dot-com era, while overall rents fell by 38.6%, sublease rents declined 46%. Similarly, in the Great Financial Crisis, direct rents fell 23.9%, but sublease rents fell 31.9%. On the bright side, this does create more options for tenants, and today is no exception. Numerous, though generally small, sublease options exist across Boston. Many of these are in good locations and buildings with nice build-outs. 

Looking ahead, it’s still unclear where rents will fall in the near future, but we expect them to fall eventually. So far, landlords have held on to asking rents, which have shown virtually no movement at a market level yet. Sublease space rent, on the other hand, has already declined 4.5% since the end of 2019. Our team is hearing of sublease space being held back now that will be coming on to the market, adding to sublease inventory in the months ahead. June was a particularly difficult month for the real estate market, as sublease inventory grew at the highest rate year-to-date. If history is our guide, the rent declines to come for direct space will only be magnified in the sublease market.