According to global property consultant CBRE, the amount of sublease space in Manhattan ballooned during the Covid-19 pandemic, as tenants looked to cut costs by shedding space they thought they would not need. Since the beginning of 2020, 19.3 million sq. ft. of gross sublease space has been added to the Manhattan office market, and sublease space now accounts 26% of all available space as of June 1, 2021. The Great Financial Crisis saw an even more dramatic increase in sublease space, with 23.7 million sq. ft. of gross space added in 2008-2009, accounting for 31% of all available space in the market at that time.
A flood of sublease space tends to be a drag on the market, causing the availability rate to rise and dragging down pricing, since sublessors often price their space at a discount to landlords' direct space offerings. For this reason, trends in the sublease market are considered a bellwether for the overall market performance and changes in the momentum of the sublease market are closely monitored.
CBRE says a change appears to be underway in Manhattan. First, the amount of new sublease additions has begun to slow. Second, some tenants that listed sublease space after the pandemic hit are now pulling them off the market, in anticipation of reoccupying the space as their workers return to the office and hiring resumes.
In 2009-2010, following the Great Financial Crisis, 13.6 million sq. ft., or 57% of the gross sublease space added during the recession was eventually withdrawn from the market, says CBRE.
A similar sublease withdrawal trend appears to have commenced in Manhattan today. Thus far in 2021, 2.0 million sq. ft. of sublease space has been withdrawn from the market, with more than half of that occurring in April and May. Notably, 60% of all sublease spaces 25,000 sq. ft. or larger withdrawn from the market were recaptured for re-occupancy by the original tenant(see figure 3). As companies bring more workers back to the office-- most for the majority of the work week--sublease offerings are being trimmed or withdrawn altogether.
There is still a long way to go to absorb the large volume of sublease space currently on the market, but with the volume of new additions slowing down, the pace of space withdrawals picking up, and the economy adding back office-using jobs at a steady clip - there is more cause for optimism that the office market is nearing the beginning of the end of its downturn, says CBRE.