Sublease Vacancy Rates Holding Steady by Arthur Jones, Economist
April 11, 2008 – “About Real Estate” published by Torto Wheaton
Sublease vacancy rates are a small but important component of the overall or total vacancy. While
sublease vacancy tends to be a fraction of total vacancy, it represents movement, so this rate that
can tell us a great deal about the overall health of the office market. During the last recession,
spurred on by the dot-com bust in 2001 and the events of September 11th, sublease vacancy rates
rose as high as 3.7%, as employers tossed in their keys. The fallout from the last recession was
nothing if not devastating for the office market, which did not recover fully until 2004.
As fears of a recession are again at the forefront, all eyes have turned toward the condition of the
office market and, yes, this includes sublease vacancy rates. Since we have seen some upward
pressure on cap rates and vacancy rates have risen to 12.9% in the first quarter of 2008, we cannot deny that there have been some signs of weakness in the market; but it is a little too soon to panic.
The office market is still on solid footing and sublease activity has remained subdued, though overall
vacancy rates have increased.
Sublease vacancy rates have gained some attention over the past few months as office market
analysts have looked for an up-tick in sublease activity, which would signal that more serious
problems may be facing commercial real estate. As sublease space becomes available, it
competes with existing space and is often offered at a discount. Increasing sublease activity in the
office market would be a sign of trouble for landlords, who already face decreased demand as
employment growth has slowed.
While there has been some sentiment in the media and among real estate professionals that
sublease activity has already started to pick up amid a slowing economic growth, these claims
appear to be based on anecdote rather than hard evidence. The latest data we have on sublease
vacancy rates show that, while total vacancy has increased, the sublease vacancy rate remained
unchanged during the first quarter of 2008. In fact, the sublease vacancy rate, at 1.3%, is at its
lowest level since the last recession.
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