By Mike Rensch, Investors Realty
The Omaha office market is facing an increasing amount of sublease space, which is having a significant impact on what spaces tenants prefer to lease right now. This is directly affecting all aspects of the overall office market as well. As the second quarter came to a close, the direct vacancy rate was 7.4 percent, compared with 7.6 percent in the second quarter of 2022.
With that said, those numbers do not paint the whole picture because they do not account for the amount of sublease space on the market. The availability rate (which includes direct space and sublease space available) was at 9.8 percent compared with 8.4 percent in the second quarter of 2022. We see this trend continuing for the time being as companies grapple with whether or not to bring their employees back to the office.
At the end of the second quarter, there was 841,000 square feet of sublease space available in Omaha, up from 723,000 square feet at the end of the second quarter of 2022. This represents a 14 percent increase in sublease space over the past year. It reached its peak of 919,000 square feet of available sublease space at the end of the fourth quarter of 2022.
To put these numbers in perspective, most years prior to the pandemic there was 100,000 square feet (+/-) of sublease space on the market at any given time. Additionally, much of the sublease space comes with modern updated furniture, putting landlords trying to do direct deals at a disadvantage.
The increase in sublease space is being driven by a number of factors, including:
• The ongoing shift to remote work, which has led some companies to downsize or eliminate their office space needs
• The closing of some businesses
• High construction costs making deals in first- and second-generation spaces cost prohibitive for tenants and landlords alike
The trend of increasing sublease space is expected to continue in the Omaha office market in the near future. This is likely to put further downward pressure on rents and upward pressure on availability rates. Companies that are looking for space in Omaha should be aware of the availability of sublease space in the market. They may be able to find a better deal by subleasing.
Many times, a company just wants to reduce their liabilities. There have been a handful of sublease deals in Omaha the last two years where the subtenant was able to get a 50 percent reduction from the stated rent in the prime lease.
Large amounts of sublease space on the market can have a significant impact on the overall office market. Here are some of the ways it can affect the market:
Increased supply, tenant choices
One of the immediate impacts of a high sublease availability is the increase in supply of office spaces in the market. For tenants/subtenants, this means increased flexibility and negotiating power as they can choose from a broader range of available spaces.
Pressure on direct lease market
The surge in sublease availability has put significant pressure on the direct lease market, where landlords lease space directly to tenants without involving subleases. Landlords are now competing not only with each other but also with sublease listings, which can be more affordable and offer shorter lease terms in many instances. As a result, landlords are forced to be more flexible and creative in their leasing strategies to attract and retain tenants.
Shorter lease terms, increased flexibility
Sublease arrangements often come with shorter lease terms and increased flexibility compared with traditional direct leases. This trend has accelerated with the rise of coworking and flexible office space providers. For tenants seeking agility in their lease commitments, subleasing offers the opportunity to secure space for shorter durations many times, aligning better with uncertain business needs.
Opportunities for expansion, diversification
For some businesses, the availability of sublease space presents opportunities for expansion and diversification. Companies looking to enter new markets or test different office configurations can do so more easily by subleasing space. This can be a cost-effective way to explore new opportunities without committing to long-term leases.
It is an interesting time for office landlords. Any reasonable offer with a quality tenant needs to be entertained and evaluated. This is hopefully a temporary predicament we are in within the office sector.
Locally, history has proved Omaha is a resilient market with a strong economy and a diverse business community. This makes it a desirable place for businesses to locate, even in times of economic uncertainty. The city is home to many universities and colleges and has a low cost of living, making it an attractive place to operate a business.
As brokers, we are optimistic that as more local medium to large companies bring their employees back to the office the market will stabilize, and we will start seeing more fully occupied buildings. At that point, we will be discussing the need for new construction.
Mike Rensch is an office broker with Investors Realty Inc. This article originally appeared in the October 2023 issue of Heartland Real Estate Business magazine.