Sublease Space All Around Us

By Melissa Securda

The leading story in almost every newspaper or on television seems to have something to do with the sub-prime mortgage lending debacle. We hear how individuals and businesses are affected by an onslaught of problems associated with the crisis. A recent Wall Street Journal article explains another effect of the crisis – a slowing national office market. 

Data provided by Grubb & Ellis Co. shows an increase of 4 million square feet in sublease space since second quarter, the largest increase since 2002. What is behind such a significant increase? As many businesses associated with mortgage lending make efforts to reduce their overall costs, they are starting to close locations, adding vacant, sublease space to the market. 

While it still might be too soon to tell what the fallout will be, companies across the U.S. are closing shop and in many cases, filing for bankruptcy.  In Tuscon, Ariz., First Magnus Financial Corporation filed for bankruptcy, fired over 5,500 employees and returned 115,000 square feet of prime office space to the market. While not yet vacant, HomeBanc will add thousands square feet of sublease space to the Atlanta office market. In one of the hardest hit areas, Miami-Dade county, sublease space increased 28 percent since fall 2006 and 36 percent in Fort Lauderdale-Broward County during that same time frame. 

Despite rising operating costs, landlords won’t be able to increase rents in the short term.  Existing direct space and newly constructed space has to compete with sublease space being offered at below market rental rates. What do you think the long term effects will be? What are you seeing in your market?