Opportunity in the Shadows: A Look at the Texas Sublease Market

September 23, 2020


Shadow space — a colorful term referring to square footage that’s currently leased, but not being utilized – often resembles the underlying demand characteristics of a local market. Furthermore, if elevated, shadow space, can also serve as an important data point in understanding a specific market’s health and future trajectory. This is of particular use during times of economic slowdown or market disruption as tenants consider next steps.   

Without question, 2020 has been anything but normal, ushering in unprecedented changed. Within this change, compelling opportunities have emerged for tenants looking to re-negotiate their lease terms or expand into new space. With that in mind, let’s explore the four major Texas office markets before shelter-in-place restrictions compared to today – and how to position your real estate needs moving forward.

Available Sublease Inventory

As we approach the end of the third quarter, the Dallas/Fort Worth office market holds the unflattering top spot with more than 7 million square feet of sublet space surpassing Houston’s 6.0 million square feet. Houston, which has suffered from a glut of sublease space in recent years, has reversed course through leasing activity and lease expirations which convert sublease vacancy into direct vacancy. Meanwhile, the tech heavy Austin market has seen the amount of sublet space steadily tick higher over the past year, and stood at 2.7 million square feet by the end of September. By contrast, the steady economic anchors — government and military — has prompted very little change in San Antonio.

When it comes to sublease inventory, the pools of space are a reflection of the end user. For example, Dallas-Fort Worth sports a diverse range of office-using tenants across myriad industries, which helps explain the almost equal balance of availability between smaller and larger blocks of space (below and above 50,000-square-foot). On the other hand, Houston’s office market which is prone to the ups and downs of the energy sector tends to see larger blocks of sublease space become available as companies quickly adjust expansion plans or a function of increased M&A activity. As such, the Houston market represents a larger percentage of big block space relative to its Texas counterparts.

Finally, the higher percentage of smaller sublet spaces in Austin and San Antonio reflect the number of small- to medium-sized businesses that you typically find within these markets.    

Where is the Opportunity?

The vast majority of big blocks of space – those opportunities that exceed 100,000 square feet – are located in the Dallas /Fort Worth and Houston office markets. Today, you can find 14 such blocks of space available in DFW and 12 in Houston which represents a combined 4.6 million square feet. Furthermore, the vast majority of this space is located in Class A buildings, a helpful benefit for companies looking to enter or expand in the market. Not to be forgotten, while less in number, Austin has three big blocks of sublease space.  We believe this is likely to increase before we have a vaccine for Covid.

By submarket, the largest concentration of sublease space resides in:

  • Downtown Houston: 1.3 million sq. ft.
  • Upper Tollway/West Plano: 1.2 million sq. ft.
  • Downtown Dallas: 1.1 million sq. ft.
  • Energy Corridor: 1.0 million sq. ft.
  • Downtown Austin: 750,000 sq. ft.

Great, But What Does This Mean?

In the end, sublease or shadow inventory provides another data point for consideration. The amount of sublease space in a given market provides insight on the overall supply and demand dynamics and can prompt discussions with an real estate advisor about reducing expenses, re-negotiating an existing lease, or exploring growth and expansion opportunities.

While there are many considerations with sublease space that require vetting – including the sub-landlord’s creditworthiness, the remaining length of the lease term, and any discount compared to leasing space directly – for a tenant looking to grow, the sublease market can present great opportunities with short- and long-term benefits and maximize flexibility.  

To discuss opportunities in the shadows of your market, contact us at hello@rubicrown.com or call 512.298.1200.