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Office Subleasing Soars In Boston And Other Tech-Heavy Cities

The Boston skyline

The amount of subleased office space in the Boston hit a 10-year high in the second quarter as former high flyers such as online travel company TripAdvisor and restaurant management platform Toast scaled back their footprints following layoff announcements.

A report from commercial real estate company Hunneman shows that more than 700K SF of sublease space on the Boston market is more than double the roughly 300K available In Q2 2019. By the end of the summer, the total amount of subleased space on the market in Beantown could top 2M SF, Hunneman Director of Research Tucker White told Bisnow.

Though much of the vacated space is in the Financial District, other neighborhoods are also seeing an increase in the amount of office space givebacks. TripAdvisor is trying to sublease 54K SF at its former Boston office at 226 Causeway St. in the city's North Station submarket. The 75k SF Toast space is at the Landmark Center in the Fenway/Kenmore neighborhood.

"Over the last 18 months, financial services firms have by far given back the most sublease space until now," White wrote in a research report sent to clients last week. "However, this quarter TAMI (technology, advertising, marketing, and information) surpassed financial service firms and are expected to drive most of the new sublease space hitting the market over the next several quarters."

The surge in subleasing isn't limited to Boston.

Atlanta's sublease market grew by nearly 800K SF in the second quarter, according to CBRE, and about 20% of that inventory came online between May and June. San Francisco sublease inventory reached a new high of 4.6M SF, according to a CBRE report cited by the San Francisco Business Times. That's the largest amount of sublease space in the U.S. and accounts for roughly 41% of the city's total office space, a level not seen since 2001.

New York City's office market, the densest of all major cities, is also of concern even though sublease availability has been stable during the coronavirus pandemic. 

"We are closely monitoring the market as there have been rumors of additional sublet space possibly being added to the available inventory in the coming weeks and months," Colliers Senior Managing Director Frank Wallace wrote in an email. "Some tenants have reportedly chosen to wait until New York City began reopening before putting sublet space on the market.”

Finding office space in Boston is challenging under the best of circumstances. Supplies are limited by a shortage of large blocks of space within city limits. Boston's 7.9% office vacancy rate before the crisis was the lowest it had been since 2001.

Subleasing is attractive to companies that are looking for flexibility or move-in-ready space, furniture included. Lessors also may be willing to offer potential tenants a break on their rent, said Aaron Jodka, Colliers' managing director of research and client services in Boston.

"Many of these spaces are in good locations, good buildings, built out [with] a nice design that will allow tenants to have more opportunities," Jodka said.

Property owners are eager to avoid reducing their rents, though they are willing to offer other concessions, such as enhanced tenant improvements allowances and free rent periods.

The long-term ramifications of the surge in subleasing may not be evident for a while.

"We are expecting a major change in market dynamics to shift in the tenants’ favor, caused by the surge of sublease space that has already started to impact market rents in downtown Boston," Derek Losi, a vice president in Boston for tenant rep brokerage Cresa, wrote in an email. "Historically, during a major financial crisis, it has taken 4-6 quarters for market pricing to adjust downward and catch up to the dip in the economy."