SF Business Times: No vacancy: S.F. sublease space falls to 13-year low

| November 25, 2013 | 0 Comments

I remember sitting in a sales meeting in early 2001 at my old company when our research guy showed us some data that got my attention. We learned that the volume of available sublease space had surpassed that offered directly from building owners. Even though this wasn’t a stat that was commonly tracked back then, I  knew that this meant a major change was coming. Sure enough, the market crashed shortly thereafter, driven down– and fast– in no small part because of this sudden preponderance of volatile sublease space.

In his column last week, J.K. Dineen looks at my personal favorite market benchmark. According to the article,  the San Francisco market shows sublease space to be in short supply, and what is out there not trading at the sort of discount that one would expect.

Our data shows a similar situation developing on the Peninsula, with sublease space comprising a mere 15% of available space in San Mateo County- and given the weakness in some peripheral sub markets (a spread really not seen as much up in The City), in some ways this is almost more impressive than the SF stats. In some submarkets there is virtually zero sublease inventory.   (The sublease vacancy is about 18.5% if you factor in Palo Alto and Mtn. View, but a single very large sublease skews the numbers– trust me, sublease space there is plenty scarce)

A heavy percentage of sublease space deals a double whammy to the market- it generally means a weakening appetite by larger tenants, and, more importantly, it creates pricing chaos. A tenant unloading surplus space is more concerned with a quick deal than a building owner looking at long-term building valuations.

After years of rent growth, it’s not unreasonable to look for signs of weakness, but the current  light load of sublease square footage certainly suggests ongoing stability in the market.   I think that there is a heck of a lot of “shadow space” buried in the market that could pose some problems down the road, but likely not for the time being.   Stay tuned…

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