By Liz Berthelette – Director of Research
During the past two economic cycles the run-up in available sublease space preceded downturns in Greater Boston’s office market. Sublease space has ticked up by 17% over the past two years. At a macro-level this trend is not alarming; however there are some pockets of concern among the suburban submarkets.
The Route 128 Loop is at the top of the list for sublease availabilities, with nearly 1.7 M square feet of space as of fourth quarter 2016. This represents 60% of all suburban sublease availabilities. Drilling down further; this trend is concentrated in Route 128 West (specifically Waltham) with 871,000 square feet of sublease space available, which represents 4% of the submarket’s total office inventory.
Although the market is nowhere near the peak levels seen during the Dotcom bust in the early 2000’s, sublease availabilities in Route 128 West have increased by almost 87% since the end of 2014.
With a fair amount of term left on many of these subleases, this trend has created more opportunities for tenants looking for space in the Waltham market. Conversely, landlords of direct space in Class B or “value” properties are facing competition from subleases in similar assets that can offer even lower lease rates. With that said, the bigger concern is rising competition from higher-quality Class A space, which accounts for 80% of subleases here. The delta between pricing for Class A sublease space and direct Class B space has tightened ― evidenced in the chart below. Looking at asking rents among subleases and direct Class B space, the range of observations and weighted averages are nearly identical. Some tenants may be enticed to get “more bang for their buck” and relocate to a higher-quality asset.
Despite what the data says, the sublease trends we’ve observed in Waltham and Route 128 West may be less impactful than one would think. For tenants, there are downsides to executing a sublease. These include limited term and limited fit out. As we move through 2017 this is a trend we will definitely be keeping our eye on.