The Rate of Industrial Sublease Space Hitting the Market Is At the Highest Level in Over A Decade.
5% of the national industrial listings falling in the sublease category does not sound alarming.
But in Q2 of 2023, the amount of industrial space for sublease in the United States rose by 28 million square feet; this is the largest increase in industrial sublease square feet to hit the market in one quarter since Costar began tracking the data in 2007.
An Overview
The industrial sublease rates went from a historically low rate in 2021 and early 2022 with the lowest point at just over 55 million square feet of sublease availability.
In the summer of 2022, the industrial sublease inventory began to increase.
As of March 2023, the industrial sublease rate is at an historically high amount with over 97 million square feet of industrial space for sublease across the United States.
What Type of Industrial Real Estate Is Being Subleased?
Not all industrial real estate is the same! I discussed the discrepancy between industrial vacancy rates across different square footages in a recent blog you can read here.
The typical industrial building that is being marketed for sublease is a class A, newer construction space that was leased in the past 6 years.
Who are the Lessors and Lessees of the Industrial Sublease Inventory?
The Lessors are typically companies that have signed a lease in the past few years. In fact, 61% of the sublease inventory are for leases signed in 2021 and 2022.
The most common sublet spaces are ecommerce at 29%, consumer goods at 23.6%, and manufacturing at 20.2%.
The typical lessee occupying subleased space is a mixed bag.
The rise in sublease space is contributing to the rise in vacancy rates among class A large industrial buildings.
What has caused the spike in sublease inventory?
In early 2022, Amazon announced they would be offering more industrial space for sublease. An easy answer would be to point fingers at a couple of giants like Amazon, but their sublease inventory only makes up a fraction of the sublease market.
There are multiple factors impacting the sublease market.
When supply chains were originally disrupted, many industries operating in a “just in time” inventory system had to quickly switch to a “just in case” inventory system.
This meant manufacturers, suppliers, and companies across several categories were trying to stock pile inventory due to supply chain disruptions. This was one contributing factor to the sky rocket in industrial demand in 2021 and 2022.
There are other, less obvious factors, impacting the sublease market.
For example, the rise in residential mortgage rates have caused home sales to decline.
Home furnishing sales decline when the residential market slows. There are several national home furniture stores attempting to sublease more than 500,000 sq ft of industrial space in the United States
Where Are Sublease Rates Currently the Highest?
Over all, the markets being impacted the most by the rise in sublease inventory are west coast markets. The single market with the highest square feet available for both direct and sublet is the Dallas Fort Worth market with 120 million square feet available either direct or sublet.
Is this true for all industrial real estate and all markets?
Absolutely not! Industrial real estate is very diverse among different markets, sizes, and categories.
How Does Spartanburg compare?
Compared to the national statistics we discussed, how does Spartanburg, S.C.’s industrial real estate compare?
The Upstate and Charleston are two South Carolina markets in particular that have been hit with a wave of new industrial inventory just as demand began to decline.
In Spartanburg, for industrial buildings over 100,000 sq ft, there is 7.9 million sq ft available for lease.
Of the 7.9 million square feet of industrial inventory, 1.8 million is sublet space.
Overall, industrial vacancy rates are much higher for the larger industrial buildings.
Conclusion
Although only 5% of the national industrial listings are sublet, the rise in sublet space in Q2 2023 is the largest increase we have seen since Costar began recording the data in 2007.
The typical industrial space for sublease is large, class A industrial space where a lease was signed in the past few years.
There are a variety of factors that have contributed to the sudden increase in industrial space for sublease.
In my opinion, the market for smaller industrial buildings in the Upstate of S.C. will remain strong.
Did you find this blog insightful? Would you like to discuss this blog or anything related to commercial real estate? Let’s connect!
Emma McDaniel
864-576-4660
Sources
Costar
Savills USA | High-Quality Warehouse Sublets Hit the Market as Occupiers Rightsize
High-Quality Warehouse Sublets Hit the Market as Occupiers Rightsize | GlobeSt
US Industrial Sublease Listings Jump to Highest Level Since 2010 (costar.com)
