Richmond

Douglas

Richmond, Virginia, like many office markets, never needed to track the availability of sublease space. In most periods, less than 50,000 to 75,000 square feet was offered for sublease in the total market.

Subleasing became a real phenomenon with the burst of the Internet bubble and in the aftermath of September 11, 2001. Richmond experienced its peak in suburban office sublease space in January 2002. It showed healthy signs of recovery by April of that year, but by December it was back to almost near-record low levels.

In January 2002, the Richmond office market had about 700,000 square feet of sublease space available. Currently the sublease market totals about 625,000 feet of space. While there certainly have been subleases that have been secured by tenants, thus offering up positive absorption, sublease space continues to pepper the marketplace, distorting the absorption and vacancy figures.

Sublease space continues to become available on the market, and the smaller spaces are being picked up due to an increase in activity among smaller tenants. Further, some of the subleases that have been around since January 2002 have expired or have been bought out and are now vacant spaces held by the landlords. Landlords and sub-landlords have reacted to the soft market by increasing incentives to both tenants and brokers. Recent major sublease spaces include Kemper Insurance (30,000 square feet) and Hospital Corporation of America’s (HCA) absorption of sublease space in the Boulders.

Richmond is fortunate in that it is not a city that is reliant on a single industry. While the area has several large users such as Philip Morris and Capital One, past real estate development has been on a controlled basis and thus the market is currently only experiencing an overall vacancy, including sublease and landlord space, of approximately 14 percent.

It is Thalhimer’s observation that subleasing of large spaces is certainly more common in larger cities. The Wall Street Journal recently reported that eight major cities now have vacancies, including sublease space, in excess of 20 percent. The term “the bigger you are the harder you fall” may come into play here, as bigger cities may have seen more expansion during the Internet bubble than secondary cities.

Throughout 2003, Thalhimer expects the addition of sublease space at a decreasing rate. Thus, the overall sublease space available will decrease as the subleases roll over to the landlords and tenants take advantage of reduced rental rates and lease flexibility through subleasing. Combining a low sublease rental rate with a competitively priced new lease can be an advantage to those tenants in the marketplace.

On the downside, the lack of tenant improvement allowances, renewal options and other business terms can make it difficult to sublease space. Further, a subtenant may not be willing to incorporate a sublease document into an existing lease that may contain legal provisions.

To be attractive in the current soft leasing market, a sublease offering must be very competitive compared to space available directly from the landlord. To attract brokers, sub-landlords may end up offering higher fees and bonus arrangements to offset the usually short lease term associated with a sublease.

Subleasing will remain a problem in most markets until corporate America begins to expand again.

- Mark Douglas, senior vice president, Thalhimer

Raleigh/Durham

Harvey

“Sublease space is on the rise in Raleigh/Durham, North Carolina, and it is unlikely that the market has reached bottom yet,” says Guy Harvey, principal with Insignia MetaPartners in Raleigh. “Local, regional and national corporations’ retrenching has resulted in excess space being put on the market. Additionally, utilization rates are decreasing.”

James Anthony Jr. of AnthonyAllenton ONCOR International in Raleigh disagrees. “Sublease space is actually being absorbed faster than direct lease space,” he says, adding that it has reached a plateau. Approximately 3.4 million square feet is currently on the market, which is 600,000 square feet less than last year at this time, according to Anthony.

The Raleigh/Durham market was hit hard and early by the sublease supply flood, explains Anthony. “Our head start put us into the good side of the curve faster than some markets, but we still have a huge problem,” he says.

Harvey notes that vacancy rates are pushing upwards, which causes rental depression, increased concessions and more flexible terms for tenants. Brokers representing these tenants are faced with the tall task of sorting through the myriad of real estate options to recommend the right options for their clients.

Anthony

Anthony agrees: “This is a great time to be a tenant, but it’s hard on landlords and brokers,” he says. In terms of how sublease space is affecting vacancy rates, Anthony explains, “Add 8 percent sublease availability on top of the direct lease vacancy rate of 18 percent, and the overall office market vacancy rate today is 26 percent.”

Some recently signed subleases include Martin Marietta Materials’ 28,000-square-foot lease from Clear Channel Communications; Pinpoint Networks for 20,000 square feet; Lulu Technology for 7,000 square feet; and Centex Homes is in negotiation for 20,000 square feet, according to Anthony.

Looking toward the remainder of the year, Harvey says that some space will be redirected back to landlords, while additional space will be put on the market — however, most likely not in the bulk that has occurred in the last 18 months.

“2003 will see declines in sublease space supply due to lease absorption and lease expirations,” says Anthony. “Overall market vacancy rates will decline as well.”

- compiled by Julie Fritz

Atlanta

Statistically, Atlanta’s office market is continuing to see an increase in sublease space available as evidenced by the total inventory of sublease space, which skyrocketed from 2.76 million square feet at the end of 2000 to more than 6.2 million square feet available at the end of 2002. From 2000 to 2001, the sublease inventory grew 2.1 million square feet. During the next calendar year, the inventory grew less rapidly as 1.4 million square feet of space was added. 2003 will most likely show a further reduction in the growth rate with 500,000 to 1 million square feet added. The addition of sublease is never a good sign; however, the slowdown in the rate in which it is being added is an encouraging trend.

Lack of job growth is the cause of the rise in sublease space. Simply put, where there is negative job growth there will be negative absorption. Atlanta is projected to have no real job growth in 2003, following 2 years of unprecedented job losses. Layoffs and headcount reductions continue to plague the real estate industry.

Atlanta’s metro-wide vacancy is just under 21 percent, including the sublease inventory, which accounts for 19.3 percent of the total vacant stock. This space is heavily discounted and includes additional benefits that may include phone systems, furniture, modular workstations, generators and raised flooring. Through most of 2002, landlords generally held to pro forma rates while attempting to provide rental abatement to compete with the sublease inventory. Over the past several quarters this tactic has been revised as landlords have been forced to discount the quoted rates to compete with sublease rates, which can be 20 to 40 percent less than the landlords’ published rental rates.

Nationally, companies are seeking ways to improve the bottom line. Subleasing is not a phenomenon of large cities but is a product of companies attempting to cut costs. What may be more significant is to look at those cities having significant exposure to sectors that have been hardest hit, like telecom and technology. Most assuredly, these cities will have significant sublease space available and Atlanta is certainly among those markets.

- Tony Bartlett, Lincoln Property Company

Miami

Over the last 2 years, there has been a dramatic rise in sublease space in Miami, Florida, but Grubb & Ellis thinks it may have reached a plateau. As of first quarter 2003, there was 1.073 million square feet of sublease space available in Miami. This represents an 88 percent increase since the first quarter of 2001. However, it is important to note that the growth rate has leveled off substantially. Between the first quarters of 2001 and 2002, sublease space grew by almost 63 percent, but since then has grown by 15.7 percent.

During the initial market downturn, much of the sublease space was being dumped by telecom-related companies such as Telefonica and Ericsson, as well as by small firms that did not have the resources to weather the economic storm. More recently, as the recession has dragged on, Fortune 500 companies have made long-range business decisions that resulted in more sublease space being brought to the market. For example, last year, Barclays Bank vacated 75,000 square feet at Barclays Financial Center in the central business district, while AT&T placed more than 15,000 square feet on the market. Both companies decided that their Latin American markets would be better served from New York and Washington, D.C., respectively. Just this quarter, the German financial institution Dresdner Bank began offering 40,000 square feet for sublease with the potential for up to 63,000 square feet, depending on whether the company moves its entire operation to Germany or keeps a unit here.

Sublease space has definitely been a factor in the rising vacancies the market has experienced over the last 2 years. These sublease spaces are often aggressively priced and compete with direct space in the same building as well as in other buildings within the submarket. While direct average asking rents have remained surprisingly stable throughout the downturn, concessions such as free rent have been on the rise, as direct landlords try to compete with sub-landlords. Tenants have been the beneficiaries of the oversupply of space, many of them capitalizing on the opportunity to renew their leases early at attractive rates.

The largest sublease signed over the past several months was 50,000 square feet of the previously mentioned 75,000 square feet vacated by Barclays Bank. The space was assumed by another bank, Mellon United National Bank, prompting a name change to the building (now Mellon Financial Center).

Overall sublease space decreased between year-end 2002 and first quarter 2003, the first quarterly decline in 2 years. This, combined with the slower growth rate, suggests that the worst of the sublease crisis may be behind us. However, with more than 1 million square feet of sublease space available in a slow market, much of this space will likely revert back to landlords before it is leased.

- Jonathan Kingsley, managing director, Grubb & Ellis’ Miami office


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