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DALLAS-Office sublease space is on the rise in Greater Dallas, but the early-on prognosis is the grand total won’t eclipse 2002 when it pushed above eight million sf. Nonetheless, market watchers are warily watching a steadily rising count, now hovering four million sf or roughly 2.3% of the total inventory.

And though it’s still early in the game, the consensus is sublease will rise through year’s end. “It’s hard to predict how high it will go, but I know it will go higher,” Matthew Heidelbaugh, senior director for Cushman & Wakefield of Texas Inc., tells GlobeSt.com.

C&W’s latest count shows 4.18 million sf of sublease space, of which 2.48 million sf are empty and 1.7 million sf are occupied while being marketed. One year ago, C&W’s researchers had logged 3.3 million sf of sublease space at the Q2 close.

Grubb & Ellis Co.’s researchers found 4.02 million sf of sublease space at this year’s Q2 close versus 4.19 million sf at the end of Q1. The change is attributed to sublease rolling to direct space and not a sudden spurt of leasing in a market with 177.5 million sf overall. The Dallas trend is in line with Grubb & Ellis’ chief economist Robert Bach’s assessment.

Sam Hocker, Grubb & Ellis’ senior vice president in Dallas, says sublease spiked last year in the third and fourth quarters and he’s expecting to see history repeat itself. “In slower economic times, sublease space does tend to increase,” he says. “It’s an indicator and it’s up and it will stay up certainly for the rest of the year. We’re going to have to have real legitimate absorption for this space to go away.” Two years ago when leasing was racing full throttle, sublease space was down to 2.7 million sf, according to Grubb & Ellis.

The Grubb & Ellis team says Downtown Dallas accounts for 800,000 sf of the sublease openings. One of the larger blocks is TXU Energy Services’ Energy Plaza at 1601 Bryan St. And once again, the street is whispering that Calabasas, CA-based Countrywide Financial Corp. is going to dump a few hundred thousand sf onto the sublease market with its sale to Bank of America now complete.

“Sublease space is definitely an indicator the market is softening. We’re getting more and more sublease assignments coming in,” Heidelbaugh says, citing layoffs and downsizing. “I expect it will increase through the third quarter and probably through the rest of this year.”

Hocker doesn’t expect the market to mimic 2002′s high because it’s not just one industry suffering as it was during the dot-com crash. He says the financial market made its office adjustments in Q3 and Q4 2007 although there could be additional fallout.

The sublease change has been paced so “there won’t be any catastrophic increase,” Hocker adds. “It’s not going to be a banner year by any stretch. There will be select pieces of space that become available.”

John Amend, president of locally based Amend Group, has a reputation for driving hard bargains for tenants. He says sublease space is always evaluated early in the hunt, but often is cast aside because the sacrifice is too great since terms are shorter, renewal options aren’t available and tenant improvements just aren’t part of the deal. But, the rise in sublease does ratchet up his leverage at the bargaining table, particularly since it puts pressure on lease rates.

“Any time markets have less absorption or more vacancy, you’re going to see leverage increase on behalf of tenants,” Amend says. “It’s already a tenants’ market in class A minus and below.”

Amend says concessions, more flexible terms and conditions and overall better lease transactions are going to emerge as the market changes and the economic chokehold continues. “The conditions are going to last at least two years, if not longer, and it’s going to get worse,” he predicts. “The problem of sublease space is happening because we’re in a period of uncertain times.”

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