SUBLEASE MARKET: Tenant Demand
The third quarter saw a dramatic increase in the number of properties and square footage on the market for sublease. We expect these numbers to continue to rise in the fourth quarter as many companies have declared January 1, 2021 as a ‘return to office’ targeted date. In addition, a number of companies appear to have embraced the concept of moving their workforces to home offices. These factors also attributed to reduced leasing activity and tenant demand in the quarter. However, we expect to see tenants who are seeking space benefiting from the sublease market and the terms that may be achieved in such a market.
Work on office construction projects already underway continued in the third quarter and 450,000 in Class A product was completed. In addition, owner user and pre-leased projects broke ground or continued with pre-development. However, delays are being experienced due to high demand and low supply of critical construction items. Lumber prices have increased dramatically from the time many projects were designed to when they were scheduled to break ground, which may delay project starts until pricing normalizes.
While the third quarter saw leasing activity dip, the demand for investments in the market saw a large recovery. This reflects the desire of many out of state investors to place money in the Treasure Valley and perhaps exit larger markets that can be more affected by natural events such as the pandemic or have experienced social unrest in the past 6 months. In many cases, these investment dollars are in the form of 1031 exchanges. Low inventory of quality office investment assets remains a challenge for both investors and owner users. However, we would expect to see the interest mentioned above to be reflected in office investment sales numbers being up in the fourth quarter.