• Between Q3 2009 and Q1 2020, quarterly sublease totals averaged around 110 million square feet; Q2 2021 is almost double that amount.
• Almost half of all U.S. sublease availability is in the top office markets.
• Downtown markets heavy in tech-related jobs such as San Francisco and Seattle have the highest sublease availability rates, 8.8% and 4.3%, respectively.
• Sublease asking rents are currently an average of 26.7% below direct space rents.
• Uncertainty around the Delta variant could disrupt the recent trend of falling growth in additional sublease spaces.

The rapid growth of sublease space has been a headline story in the U.S. office market downturn, which has now spanned five quarters. A record 208.6 million square feet of sublease space is available across the U.S. office market, significantly higher than at the prior peak of 143.3 million square feet in Q2 2009, the height of the global financial crisis.

The impact of sublease space varies notably in the top U.S. office markets. Total sublease space across these markets is 100.5 million square feet, up from 89.8 million square feet at year-end 2020. Just over one-fifth of this space (20.8 million square feet) is in Manhattan; Los Angeles has the next highest amount, at 12.2 million square feet; next are Chicago (10.6 million square feet) and Washington, D.C. (9.1 million square feet.)

Considering downtown sublease availability rates, San Francisco is by far the most beleaguered market, at 8.8%; meanwhile, downtown Silicon Valley is closer to the average of 3.5%. A series of major givebacks by tech firms, some choosing not to occupy new premises they pre-leased, has been a key factor in driving up these levels in the Bay Area. Another tech-driven market, Seattle, follows at 4.3% sublease availability. Washington, D.C., is the least impacted at 2.1%, due to the high concentration of government occupancy.

Some of the sublease space is of Class A quality, with high-end finishes and a decent amount of remaining term. Such space competes with the direct leasing market because of its significant rental discount. The average discount in asking rents between Class A direct and sublease space in the downtown areas of the top office markets has been trending between 25% and 30%, currently at 26.7%. With vacancy rates of over 20%, it’s not surprising that Houston and Dallas have the greatest sublease rental discounts, at 49.2% and 37.5%, respectively. Downtown Chicago also ranks high at 34.9%. Silicon Valley has by far the lowest difference, just 10.8%.

While the growth of subleasing has slowed in recent quarters, the uncertainty around the Delta variant is putting companies’ plans in a state of flux. Sublease rate growth could continue to trend down into 2022, but there still are enough unknowns to be cautious about the future of subleasing. However, as business confidence rises, tenants will be more comfortable taking longer-term leases, and while sublease options exist, we anticipate a pick-up in direct leasing.