CompStat: Surpassing Expectations – 2023 Sublease Rates vs. Direct Pricing

While U.S. reached record sublease availability, starting rents for short-term signed subleases still outpaced direct pricing in 2023 for gateway markets.

Warehouse space for sublease in the U.S. hit a record high of 156 million square feet in the fourth quarter of 2023, according to recent data from Savills. This amount is reportedly more than three times the amount available two years ago and is contributing to some softening in the market, as users have many more options for space than they did even one year ago. According to CompStak data, the spread between direct and sublease transactions with terms of 36 months or less in 12 major industrial markets narrowed from 9.5% in 2019 to 5.6% in 2023. From 2022 to 2023, average starting rents for direct and sublease space rose 12.5% and 7%, respectively. Starting rents for direct leases were on average lower compared to subleases in every year except 2020. In Q2 2020, Amazon’s 1 million-square-foot lease at 5515 Grand Avenue in the New York City market in Q2 2020 at $40/SF helped push average starting rents of direct leases higher that year. Notably, average direct rents usually outpaced average sublease rents in the Southern California (LA-OC-Inland Empire market), but the reverse was largely true for overall Gateway markets since 2019. In addition, CompStak’s data shows the average difference between direct starting rents and those of subleases has whittled even further in the LA-OC-Inland Empire market, from 9.9% in 2019 to 1.8% in 2023. In this market, average starting rents for direct space rose 2.6% while sublease space declined 2.7%, from 2022 to 2023. In 2022, average starting rents for subleased transactions complete surpassed those for direct leases in the LA-OC-Inland Empire market. Larger deals such as Sam’s Club’s lease for 270,194 square feet at $24/SF in the LA-OC-Inland Empire market also had an impact on higher average sublease starting rents in that year

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🎯 While some reports indicate office leasing is waning in Miami, a NYC hedge fund, J. Goldman & Co., made headlines recently for agreeing to take space in a new building, Fifth Miami Beach, where asking rents are reportedly in the $170 per square foot range. According to CompStak’s data since 2018, average starting rents for office transactions in both Miami and Palm Beach spiked in 2022 but remained well above pre-pandemic levels in 2023 overall. In 2023, Miami’s average starting rent reached $57 per square foot, up 40.4% from 2019, while Palm Beach’s average was up more than 21% from 2019 to 2023. In Miami’s Brickell submarket, the average reached $114 per square foot in 2022, more than double 2019’s average, largely due to leasing at 830 Brickell Plaza, and then dropped somewhat to $86 in 2023.

📈 The city of Chicago is forging ahead with a plan to revitalize a portion of its downtown with a plan entitled “LaSalle Street Reimagined” and will be revealing specifics this Spring. This could be crucial because next year (2025) is a peak single year for lease expirations in the overall Loop area in Chicago, and about 18% of those leases expiring is concentrated in the Central Loop submarket which contains the proposed La Salle Street revitalization area. According to CompStak, significant 2025 lease expirations include Bank of Montreal at 115 South LaSalle Street and Greenberg Traurig at 77 West Upper Wacker Drive, with both tenants set to relocate to the West Loop.  In addition, Northern Trust at 181 West Madison Street also tops the list for major expirations in 2025 in the Central Loop submarket.

💸 Warehouse supply in Cook County, Illinois could be facing possible headwinds following recent changes to a village zoning code aimed at preventing office-to-industrial conversions. The Chicago suburb of Deerfield will amend the village’s zoning code to restrict conversions that are gaining interest as firms reduce their office footprints but 3PL centers expand. Coupled with new traffic plan requirements for certain special use permits over 50,000 square feet, future industrial development could be severely limited in this market. According to CompStak’s data, average starting rents for industrial space at or above 50,000 square feet in that market increased from $5.48/SF in 2019 to $7.47/SF in 2023, a 36.2% increase. Meanwhile, average starting rents for office space above 50,000 square feet in the Chicago Non-CBD market saw a decrease of 9.7% from 2019 to 2023, from $23.94/SF to $21.61/SF, according to CompStak data.  PepsiCo renewed its industrial lease for 107,918 square feet in Q4 2023 in one of the highest starting rents of 2023 at $19/SF. Meanwhile, firm Greenberg Traurig leased 91,644 square feet of office space at 360 North Green in the West Loop in North Chicago in Q3 2023 at $47/SF. 

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