As the Maryland office market begins to recover from the pandemic, commercial real estate owners and brokers are grappling with two immediate challenges – heightened availability of sublet space and escalating construction costs.
“Sublet opportunities definitely seem more numerous than pre-pandemic, especially in city locations,” said John Hermann, Vice President, Asset Management/Leasing at COPT. “These present opportunities for companies looking for short-term lease commitments.”
“There is more sublet space within the region than there has ever been before,” Robert Manekin, Managing Director – Markets at JLL, said in May. “Typically, that sublet space is a drag on regular leasing. However, 40 of the 98 sublet opportunities are for more than 10,000 square feet and 20 of those 40 are for more than 25,000 square feet. Stated another way, this time sublet space does not seem to be significantly impacting on the average size transaction.”
Terri Harrington, Senior Vice President at MacKenzie Commercial Real Estate Services, said her company has seen “an increase in subletting as tenants test the market while simultaneously figuring out their office needs in the future. In Downtown Baltimore, we have seen the rate more than double from 1.3 to 2.9 from the first quarter of 2020. I anticipate this will go up as companies start to figure out their hybrid work scenarios.”
Kevin Keane, Senior Vice President of Office Leasing at David S. Brown Enterprises, said he is seeing “more space offered for sublease throughout the Baltimore metropolitan submarkets. The sublet spaces are not easy to lease unless you get lucky and find a subtenant who just happens to be a great fit for the particular space being offered.”
In the Columbia market, Adam Nachlas, Senior Vice President at MacKenzie Commercial Real Estate Services, said he is “seeing a lot of sublease space on the market, but it has not had much effect on the general market because tenants want considerable buildout and are using space differently, putting direct space at an advantage.”
Buildout or any kind of renovation is not a simple undertaking, given recent, sharp increases in the price of lumber and many other construction materials.
“Construction pricing is through the roof but rents are not increasing as quickly,” Hermann said.
“The biggest challenge right now is the cost of construction for tenant improvements that has risen 12 to 15 percent than before the pandemic,” Harrington said. “This is making it difficult for landlords to get new deals done without the tenant committing to a longer term lease.”
To address that situation and encourage leasing in current market conditions, “there are some pandemic ‘deals’ being made, with concessions, such as rent abatement and lower starting points for rent,” Harrington said.
JLL’s tracking shows “tenant improvement allowances for Class A product are at pre-pandemic levels. However, construction pricing is up an average of 8 percent so those allowances are buying less,” Manekin said. “With regards to Class B property, pricing for tenant improvement is flat, with incentives being free rent or lower rent.”