Is now the time to act on office sublease deals in North Texas? Experts share thoughts

This article was originally published by the Dallas Business Journal

A year after shelter-in-place began in North Texas, the impact that the pandemic has had on the office market can still be seen, particularly when looking at sublease space.

Depending on the source you use, North Texas had between 8.5 million and 9.2 million square feet of available sublease space at the end of 2020. Over the course of the year, sublease inventory increased by 50 percent, according to Avison Young. Since the start of the year, experts say sublease inventory hasn't changed much. Just under 9 million square feet of available subleases are available in North Texas as of the end of March, according to Transwestern.

"Supply has stabilized over the past four to six months and I think you’ll continue to see groups take advantage of these subleases. Potentially, when some groups get back to the office, they’ll realize they want to utilize that space and might take it off the market," said Billy Gannon, senior vice president at Transwestern.

With more companies returning to the office and potentially taking their sublease space off the market, is now the time to strike for companies looking for sublease space? How much longer will these deals remain in the market? To answer these questions, the Business Journal spoke with several local commercial real estate experts, all with experience dealing with sublease space.

Sublease demand

While there has been an influx of available sublease space in North Texas over the last 12 months, there has also been plenty of demand for it. Notable sublease deals within the last year include CarOffer moving its headquarters from Plano to Addison, a three-company sublease deal that saw Denbury Inc. (NYSE: DEN) move its headquarters within Plano, Firstsource Healthcare taking 50,000 square feet from Nokia North America at Cypress Waters and Duane Morris taking a 10,000-square-foot sublease at The Crescent. Even a year after shelter-in-place, experts say companies are still asking about sublease opportunities in the market.

"The conversations we often have with clients are centered around what kind of subleases we can find," said Robbie Baty, executive managing director and leader of Cushman & Wakefield's Office Tenant Representation practice in Dallas. "Demand has definitely gone up. The amount of available space has been consistent over the last few quarters, but I believe demand has risen."

A number of factors can make subleases a more attractive option for companies rather than leasing direct space. These include discounted rental rates, shorter lease terms and already furnished spaces.

"You can typically get in 25-35 percent lower than you would on direct market rates. On top of that, tenants can move into space that's fully furnished," said Doug Carignan, executive vice president at CBRE. "Right now, we’re at an all-time high for sublease space in the market. Certainly I think it's a good time to be in the market if you need space."

For companies eyeing North Texas for an expansion or headquarters move, sublease space could also be a good option as they enter the market.

"There's a lot of flexibility with sublease space. People don't have to make these long-term commitments. For a company that's just coming into the area, having that flexibility is really key. It also allows them to get into a space and up and operational very quickly," Carignan said.

Act now?

While not all subleases are created equal, the pandemic has brought a number of high quality spaces to market. Experts agree that these top quality subleases are likely go quickly.

"In order to take advantage of the best sublease opportunities, now is the time to strike in order to obtain the most favorable terms. As with direct space, it’s best to have multiple sublease options to negotiate with in order to create leverage to secure the best deal terms," said Maschera Usrey, senior vice president of Cresa in Dallas.

But will all good sublease deals be gone in a matter of months? Maybe not. Most local experts that spoke with the Business Journal say tenants may actually still have some time to take advantage of great deals in the market.

"I believe that there's so much space on the market that even 6-9 months from now, there are still going to be plenty of sublease opportunities in the market," Carignan said.

Others say even more sublease space could be on the way.

"I think (companies) still have more time because there's going to be a lot more (subleases) coming on the market soon. I'm confident of that," Baty said. "As companies return to the office, they’re going to find out how much space they actually need. If they had layoffs last year, they’ll find out what the impact of those were on their space needs. I don’t think they’re going to need all the space they used to."