Canary in a Coal Mine – Sublease Space On The Uptick

Sublease activity in the commercial real estate market is a lot like the “canary in a coal mine” analogy whereby it’s one of the first indicators that there is a problem looming. When sublease space activity increases significantly, that means that there is something causing businesses to contract, and not need their space.  Israel Linares, Market Analysist for Costar, one of the nation’s leading commercial real estate database companies, is reporting that a steady influx of new sublease listings has pushed office sublease availabilities in Austin, Texas to 4.5 million square feet, a record high for the market.

Interestingly, the most recent high was in late 2020 at the peak of Covid, with 4 million square feet of sublease space available. Between then until just recently, sublease availability actually dropped to under 2.5 million square feet as businesses settled into the work-from-home policies. But as tenants continue to assess office needs and adapt to more cautionary budgeting strategies in the face of a looming economic recession, many companies are reducing costs by slowing hiring or reducing headcounts.

Several examples of why we have a bloated sublease are the following:

• Solarwinds software company bringing 229,000 square feet of their southwest Austin office space to market;
• Home Depot bringing 200,000 square feet of their northeast Austin office space to market;
• Meta (parent company of Facebook) bringing 574,000 square feet of their downtown office space to market;
• VRBO bringing 98,000 square feet of their north Austin Domain space to market.

Add to the looming recession and increase in the supply of office space due to sublease inventory, several developments in the works have been halted for the time being; specifically the Domain’s 500,000 square foot Stadium Tower office project proposed by Los Angeles based Kilroy Development.

On a positive note, many feel Austin and Central Texas are still lower risk with higher reward markets with many supporting signs of this sentiment. One potential example is Elon Musk’s Twitter could possibly relocate up to 300 employees to Central Texas from San Francisco, especially considering he already has SpaceX, Telsa, and his Boring company here. If that were to happen, it would mean around 250,000 square feet of sublease space would get absorbed.

Another example is how Dallas based Stream Realty announced they are moving forward with a 182,000 square foot office building in East Austin in the first quarter of 2023.

Unlike the office market, the industrial market appears to remain strong with news of a 600,000 square foot industrial project is planned near Tesla to support businesses that work with Tesla and another 275,000 square feet of mixed use development by Atlanta based Eastgroup.

Bottom line: if a recession wasn’t looming, the Central Texas market would be on an upward trend of lower supply and increasing rents. The good news for Class A office users is with the oversupply of sublease space we should expect to see rates come down. That possibility affects tenant in Class B and C buildings as well, so expect rental rates for all class types to drop their prices to attract tenants.

For more information or if you would like to discuss your specific commercial real estate needs, call me at 512-736-5933 or email me at oddo@toweratx.com