After quarters of growth of sublease office space on the market, availability dipped slightly in the third quarter.

“Throughout the pandemic, sublease space has been reaching new highs every quarter,” Kevin Watson, a senior research analyst at Newmark Group Inc., said.
“For the first time, during this quarter, we saw it trend downward.”
 
It’s still significantly higher than it was prior to the pandemic or even during the Great Recession, however.

In the third quarter, there were 9 million square feet of sublease space on the market, up from 4.7 million square feet the first quarter of 2020, according to data from Newmark.

“Over the last 15 years, this is far and away the most sublet space we’ve seen,” Andrew Lustgarten, an executive managing director at Savills Inc., said. “During Covid, sublease space pretty much doubled.”

One of the reasons is clear: Companies are rethinking their space needs as more people work from home, either part or full time.

Jonathan Larsen, a principal and managing director at Avison Young Inc., said “exponentially more” sublease space has come online during the pandemic than in an average year. And he thinks more could be on the way as companies decide how much space they will need in the long term.

“They don’t know how much space they may need to sublease,” he said, adding that many would “right-size” their office space and may take up to 30% less space.
And if they don’t need as much space, some companies see the benefits of paying less to rent a big office.

“Companies have gotten used to remote work, and they are doing well,” Lustgarten said. “The companies that are making money without the employees in the office are questioning why they should pay the rents they are paying if they don’t need to.”
He added that many companies would downsize space, estimating that many have a 10% to 20% surplus of space currently.

Lease versus sublease

Of the more than 9 million square feet of sublease space on the market in L.A. County, some is being leased, which experts agree is one reason why the availability has gone down.

“You are seeing some good, quality sublease space coming off the market,” Josh Wrobel, a managing director at Jones Lang LaSalle Inc., said.

He added that some tenants prefer great sublease rental space to direct rentals due to rising construction costs associated with renovating rental space. Plus, some don’t want to sign long leases and can instead sign a sublease for a high-quality space and move in immediately with a shorter commitment.

Petra Durnin, head of market analytics at Raise Commercial Real Estate, said sublease spaces with short lease terms remaining “will get snatched up as companies look to test new workplace strategies.”

Some recent deals include Activision Blizzard Inc. taking over a 90,000-square-foot sublease space from Kite Pharma Inc. in Santa Monica and Riot Games Inc. leasing space from Beachbody Co. Inc. in Santa Monica.

Wrobel said there isn’t just one industry putting up the majority of the space but said in terms of who is signing leases, the gaming industry has “been a big player recently.”
“You’re seeing some of the growth of gaming groups that want second-generation space,” he said. “It’s easier to jump into second-generation space. And media and entrainment have been active in taking down space.”
 
Larsen disagreed and said he was seeing a lot of sublease space come on the market from tech companies on the Westside.
 
“A lot of it is because of the age group of the workers and the technology they have; they are able to work from home and still be effective. I see more tech-type space be available for sublease. And some of its open space,” he said. “While there’s certainly some financial, some law firm subleasing space, the bigger spaces are the tech spaces on the Westside.”

Available sublease space has roughly doubled in all submarkets since the start of the pandemic, experts agree.

West Los Angeles and downtown have the most sublease space of any market now, according to Newmark data.

In the third quarter, downtown had more than 1.5 million square feet of sublease space, up nearly 76,000 square feet in a quarter, according to data from Newmark.
“Downtown L.A., it doesn’t matter what the space looks like, you can’t give it away,” Lustgarten said.
 
West L.A. meanwhile, saw a decrease of roughly 180,000 square feet of sublease space.

“L.A. West sublease space is at a historical high,” Durnin said.
Patrick Amos, a senior vice president at CBRE Group Inc., said about a third of all sublease space now is on the Westside.

Landlord concessions

Whether the amount of sublease space on the market has affected direct leases depends. While most landlords have not lowered rental rates, many are offering more concessions than they did pre-Covid.
 
“It depends on the market (how sublease space affects direct space),” Lustgarten said. “In Century City, we’re still seeing pretty high rents, and the sublease spaces are still getting pretty good rents. Landlords are not dropping their rents to compete with sublease space. In a market like downtown L.A., landlords aren’t competing with sublease space because there is such a spread between the sublease rents and the direct rents, but they are making concessions,” Lustgarten said.

Experts said concessions can come in the form of more tenant improvement allowances, free rent, free parking and other benefits.
 
“A lot of the institutional owners are trying to offer enough free rent and hold their rates,” Larsen said.

Arty Maharajh, a research manager at Avison Young, said there’s a reason landlords offer concessions rather than lowering rents.

“Every landlord wants to hold that almighty face rate as high as possible and as stable as possible because that is their exit strategy.”
 
Larsen said for some tenants with specific needs, the higher tenant improvement allowances can be desirable as some of them want to build out space that works for them and the Covid policies they have implemented.
 
And some landlords are spending money on high-end spec spaces with more offices and less open spaces, a format they anticipate being desirable to tenants.
Larsen added that although entertainment and streaming companies are still likely signing long-term deals, many other types of companies are just signing short renewals.

But there are some positive signs in the market, and Lustgarten does not expect to see a ton of new sublease space go up.

“It spiked, it’s leveled off, and good, quality spaces have been sublet,” he said.
But Watson said there could be one wrinkle: a 500,000-square-foot space coming online that DirecTV is hoping to sublease in El Segundo.

“That’s a huge block of space and will be hard to come back from,” he said. “The trend down could be temporary, but if large blocks come on and large blocks come off, it really affects the space.”