State Farm Mulls Real Estate Needs as US Sublease Space Reaches Record Levels

Article originally posted on CoStar on February 8, 2023

Insurance Giant Prepares To Cut Jobs, Outsource IT Work

State Farm Insurance, one of the largest Fortune 500 companies with employment hubs throughout the country, is considering subleasing some of its unused real estate, the latest corporate giant to weigh what to do with excess space.

The century-old insurance giant based in Bloomington, Illinois, adopted a flexible work policy during the pandemic that allows some staff to split their time in and outside the office. More recently, State Farm announced it would outsource some information technology jobs, a move that could put additional space up for grabs.

“Based on business area needs, if we have the opportunity to re-arrange our occupied space it may allow us to reduce our overall costs and sublease unused space to a tenant,” a company spokesman told CoStar News. He declined to disclose if State Farm was in active discussions with would-be tenants.

The insurance company isn’t alone in considering what to do with excess real estate. The total amount of U.S. office sublease space on the market hit a record 242.8 million square feet at the end of 2022, representing a 24.1% increase in national sublease space from the end of 2021, according to Colliers’ research. That amount of sublease office space is only projected to grow this year, said Michael Lirtzman, head of office agency leasing at Colliers U.S.

“We have seen many firms across the country begin to accelerate their return-to-office plans, while at the same time reconsidering their occupied footprint due to hybrid workplace strategies,” Lirtzman told CoStar News in an email. “The net result has been more physical occupancy, but in marginally less space. And some of that marginal decrease is ending up on the sublease market.

“At the same time, the recent trend of workforce reductions, particularly in the tech sector, has already seen several large new subleases introduced to market in several major” metropolitan areas, Lirtzman said. “The combination of these two factors points to an increase in sublease inventory this year.”

IT Changes

Last month, State Farm announced it hired India-based HCLTech to oversee its technology infrastructure, network and help desk operations.

Hundreds of workers at State Farm have recently been notified they will be laid off in connection with the HCLTech deal. In all, 762 information technology employees at its headquarters in Illinois; at its hub in Richardson, Texas; and in Tempe, Arizona have been notified they will be let go by State Farm as part of a bigger cost-cutting measure. Some would be offered similar roles at HCLTech.

“Working successfully with them relies, in part, on the skills and knowledge of talented employees currently doing this work at State Farm,” Ashley Pettit, senior vice president and chief information officer of State Farm, said in a statement.

In Richardson, about 20 miles north of downtown Dallas, State Farm has more than 2 million square feet of office space at One CityLine, Two CityLine, Three CityLine and Four CityLine. The four buildings are in a mixed-use development with hundreds of apartments, retail and restaurants and a grocery store in the northern Dallas suburb.

Some industry watchers say the market is buzzing about the possibility of space coming available.

“State Farm is quietly evaluating their space across multiple markets,” said Steve Triolet, a research manager at Dallas-based Younger Partners who closely tracks the amount of sublease space throughout Dallas-Fort Worth and elsewhere. “In essence, this would be considered shadow space, which is not on the market and is not counted as sublease availability but could take away from absorption.” Triolet is not directly involved with State Farm.

Among the 762 employees being let go, 451 in Bloomington Illinois would be laid off at the end of March, according to one federal Worker Adjustment and Retraining Notification letter.

Similar WARN notices were filed in Texas and Arizona, with 125 employees notified in the Dallas area and 186 employees notified in the Phoenix area. Like Illinois, the employees are expected to be laid off by State Farm by the end of March, with many employees transitioning to the third-party IT provider.

State Farm has already been evaluating its real estate at its other U.S. regional hubs. Last year, Carvana moved into nearly 288,000 square feet of subleased office space once occupied by State Farm in Atlanta, according to CoStar data. That was Carvana’s second real estate deal with the insurance company. In November 2019, Carvana also signed a sublease for about 350,000 square feet of space at the insurance company’s regional hub in Tempe in the greater Phoenix metropolitan area.