Remote work trend leads growing list of firms to sublease excess space.
There appears to be no clear indicator of what the future of office space is following the COVID-19 pandemic. On the one hand, there are a number of businesses ready to get their employees back to their offices as soon as possible. Meanwhile, there’s been a lot of news recently about flexible office space company acquisitions. These both appear to be signs that as the pandemic subsides, the demand for office space will increase because employees will be returning.
Then there’s news that firms that look to be doing well are cutting down their real estate—a sign that remote work will be front and center going forward. JPMorgan Chase and Salesforce.com are the latest companies to make such a move, The Wall Street Journal reports. JPMorgan began to market 700,000 square feet of office space in lower Manhattan earlier this year. Meanwhile, Salesforce has listed space for rent in one of its San Francisco office buildings.
Subleasing has become option number one for many companies
Once a business is locked into a 10-year or longer office space lease, it’s difficult to reduce their real estate footprint. Subleasing floors to others is one of tenants’ few viable options. Subleasing looks to be becoming a trend. More than 130 million square feet of office space was available for sublease throughout the U.S. at the end of last year, according to CBRE Group, Inc.—a 40% increase and the highest that figure’s been since 2003.
Subletting office space during financial downtimes is not a new concept. What is new however is that there are no guarantees that all office tenants will reclaim or add space when the economy recovers. If companies that can afford to add real estate choose not to, it could be because they plan for more employees to continue working from home, even part time following the pandemic, according to The Wall Street Journal. If that trend continues, it’s possible that office space demand could remain low.
The uptick in subleasing has not been fun for landlords either. Rents for more expensive office spaces has already fallen approximately 17% during the past year in New York and San Francisco, and 13% nationwide, according to JLL. Meanwhile, a sublease often comes with an additional 25% discount, real estate service firm Newmark President David Falk told The Wall Street Journal. Since companies can sublease their space at a moment’s notice, it is easy to see how quickly the sublet market is rising. Phil Ryan, JLL Director of U.S. Office Research, called the speed that sublet availability is moving, “astonishing.”
Tech companies lead the sublease charge
There was a time that technology companies acquired office space more aggressively than almost any other industry, especially in San Francisco and New York. Now, tech companies are one of the more prominent players in the subleasing fold. These firms’ embrace of remote work is a big reason they are willing to reduce their office space footprint, according to analysts.
In the past, these companies would lease more space than they needed because they anticipated future growth, according to Ryan. This practice has now left tech companies with more space than they actually need. For example, cloud-storage company Dropbox signed a 700,000 square foot office development lease in San Francisco in 2017. It recently started to sublet a big portion of this space to a pair of biotech companies at a discount, The Wall Street Journal reports. Dropbox yielded some of its space because a majority of its employees will work remotely going forward. Surveys showed their employees prefer telework and were more focused at home.
Subleasing office space is not an all-around winning proposition for tenant, however. When companies sublet, it’s usually at a financial loss. Dropbox said it plans to earn more than $800 million by subletting its space, but its leases’ value will be approximately $400 million because the sublease income is less than what the company pays in rent.
Tech companies aren’t the only successful enterprises looking to get rid of office space. Financial companies and law firms have joined the fray in both cities and the suburbs. Healthcare provider AMITA Health recently put its headquarters up for sublease after it discovered its employees preferred working from home.
“Our associates’ desire to work remotely and our ability to provide alternate work environments, in turn, requires less physical office space,” AMITA Health Chief Operating Officer Thor Thordarson said.
Joe Dyton can be reached at joed@fifthgenmedia.com.
