“Subletting pandemic? The office rental business has plunged or collapsed, the city said, even as businesses tossed huge amounts of suddenly unnecessary office space into the sublet market.

Through Wolf Richter for LOUP STREET.

In the third quarter of 2020, the commercial real estate segment of office space in Houston, Manhattan, Chicago, San Francisco and Los Angeles – each representing a different region of the United States with different economic dynamics – was hit hard by the astonishing shift towards working from home (WFH) and the company’s sudden realization that after years of monopolizing all available office space for future use, it must get rid of that space.

There are big differences between cities. But all are hammered by a tsunami of sublet space, where companies that have leased space long term need to get rid of that space, and the only way to get rid of it, other than default payment of the lease, is to put it on the market and sublet it. These companies will take rents below market rents, thus driving down overall rents. An increase in sublet areas is toxic for commercial real estate.

“Total availability” – availability under sublet plus availability of space directly rented by owners – has skyrocketed in all five markets, as has “total availability rate” (availability divided by total office space). ), while rental volume either plunged or collapsed altogether. With trades nearly frozen during a glut of supply, prices are difficult to determine and will take longer to unravel.

Manhattan breathes under the weight of sublet space.

Sublease space grew 2.5 million square feet (sf), including 191,000 sf from Starr Companies at 399 Park Avenue and 147,000 sf from Omnicom Group at 1 Hudson Square.

This drove overall market availability in the third quarter to 13.3%, although rental activity plunged 45% year-on-year to 4.7 million square feet.

Class A asking rents fell 5% year-over-year to $ 93.43 per square foot per year; but the “take-up rental rate” – the rate at which leases are actually signed – fell to $ 84.39 per square foot. Overall, asking rents fell 3.1% to $ 80.29 per square foot, “largely due to the price impact of subletting additions rather than a change in the price revision of direct availability ” Savills Search reported. By submarket, rental rates ranged from $ 122.38 per square foot in Plaza North to $ 56.31 per square foot in the Financial District.

Plus, average concessions jumped about 25% to 14.3 months of free rent. In addition, leasehold improvement allowances increased 5% to $ 115.87 per square foot.

“Even though landlords are reluctant to significantly lower direct asking rents, the reality is that the gap between asking and collected rents is widening, and generous concessions will lead to lower effective rents,” said Savills.

If rental activity hasn’t plunged even further, it’s because Facebook signed the biggest third-quarter lease for 730,000 square feet in the James A. Farley Building redevelopment in Midtown.

“Evidence is mounting that occupants may be looking for a more permanent change in WFH, which could lead to a 10-20% structural reduction in overall office demand in the market,” said Savills.

“In discussions about the WFH during quarterly earnings calls, over 80% of S&P 500 companies expressed positive sentiment. Even a more permanent change to WFH for just one to two days a week at these companies could result in a potential reduction in demand for space of 9-18%, ”Savills said.

“Trophy assets will benefit from a quality-seeking trend as organizations shift the use of office space from a ‘line of work’ to centralized collaborative venues for culture. and innovation, ”said Savills.

San Francisco got the rug ripped off, rental volume collapsed.

Rental activity has slumped 88% year-over-year and more than 50% since the second quarter to a tiny 300,000 square feet. There was only one lease of over 50,000 sf.

Subletting, already high in February, has since more than doubled to more than 7.5 million square feet, the highest in San Francisco history, according to Savills Search.

Overall uptime, driven by sublet space, jumped to 17.7%, more than double the 8% uptime in 2015. Availability ranged from 13.4% in the Financial District South to 34. 8% in the Jackson Square submarket.

“This glut of cheap sublet space has spurred some price revision,” Savills said. Overall, asking rents fell 6.5% year over year to $ 75.98 per square foot per year. Class A asking rents fell 10.8% year-on-year to $ 79.55 per square foot.

However, with rental activity having collapsed to next to nothing, there has been no “opportunity for a true price discovery, and listed rents remain artificially high compared to the tsunami of sublet inventory. and rapidly increasing availability, ”said Savills.

Some of the companies that have put offices in the sublet market, after reassessing their space requirements, include Twitter (100,000 square feet at its headquarters) and AirBnB (61,000 square feet).

And Pinterest, which signed the largest lease in San Francisco in 2019 (490,000 square feet), recently agreed to pay nearly $ 90 million to terminate that lease.

“Some companies are also exploring permanent work-from-home policies, allowing employees to leave the Bay Area and continue working,” Savills said. “This will continue to impact the market now – and into the future – as companies restructure their business strategies and downsize their offices. “

Houston, most affected: double whammy from Oil Bust & WFH.

At the end of the third quarter, overall office availability in Houston hit a new high of 27.9%, down from around 17.5% in 2014, when it was already high following a boom in magnificent construction in Texas. Class A availability jumped to 29.1%.

In terms of submarkets, availability ranged from 8.4% in the Medical Center / South – with healthcare and life sciences being a large industry in Houston – through 29.5% in the Central Business District, to a catastrophic 50.7% at North Belt / Greenspoint, according to data from Savills Search.

But third-quarter rental volume plunged 47% to just 2.0 million square feet.

Overall asking rental rates have hovered in the same narrow range since 2014, with the overall asking rent currently being $ 29.15 per square foot per year. The Class A asking rent at $ 33.67 per square foot per year is down about 6% from 2014. In the years since the start of the oil fall, companies when their leases have been renewed, have opted for the newer and larger office spaces, leaving their old hollow behind and vacant. But that too seems to have come to an end now, as “cost awareness has become a priority as tenants actively seek lower cost options”.

“While optimistic landlords delay implementing downward rent revisions, the reality is that the the gap between the rates requested and the rates adopted widens and concession offers are becoming more and more competitive, ”said Savills.

The largest lease signed in the third quarter was by JP Morgan Chase for 252,000 square feet at 600 Travis Street in the Central Business District.

Downtown Chicago sublet space surged, as rental volume plunged.

Rental volume plunged 73.3% in the third quarter from a year ago, to less than 1 million square feet, and overall availability climbed to 18.6%, the highest since 2000, thanks to the sublet space that has grown to over 5 million square feet, Savills Search reported.

Given the “glut of newly available space, both live and sublet,” overall asking rents began to skid in the third quarter to hit $ 40.63 per square foot per year.

Sublease space in Los Angeles has doubled in six months.

Third-quarter office leasing activity plunged 61% year-on-year to just 1.6 million square feet as most companies “continue to suspend long-term real estate decision making with extensions to. short term representing most leases. which closed during the quarter “, Savills Search reported.

Available sublease space has nearly doubled since February to over 7.0 million square feet in the third quarter. This pushed overall uptime to 20.1%, the highest since 2012. Class A uptime increased to 19.6%.

“Quoted asking rents remain firm, even in the face of a slowing market, although they are expected to decline in the coming months,” said Savills. Overall, asking rents were stable with the second quarter at $ 3.66 per square foot per month ($ 43.92 per square foot per year).

Class A asking rent increased 1.8% to $ 3.89 per square foot per month ($ 46.68 per year). “However, this increase in average rents was only due to high priced availability in projects under construction, as most owners of existing buildings were reluctant to reduce the rents offered despite increasing downward pressure from lukewarm demand and a surge in availability, ”Savills said.

On Tuesday morning rush hour, I strolled through San Francisco’s financial district and took photos to document the horror of it all. Pedestrians were rushing to work on crowded sidewalks, jostling at red lights, then crossing the intersection, and cars were stuck in traffic, and crowds of people were coming out of the Montgomery BART and Muni subway station. Used to. Read... Haunting Photos of San Francisco’s Desolate Financial District During Morning “Rush Hours”: Visual Effects of Working From Home

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