Search and Secure

Subleases on the Rise

As they say, “the only constant is change.” That is no more evident than with office space. In 2008, many companies grew through the good times. Then, the pendulum swung to the other side. Market Crash! As a result, quality companies began to evaluate operations. The carrying cost of office space can be a drain on finances. Subleasing impacts the bottom line. If companies are not utilizing office space effectively, it may be time to search and secure a sublease.

Written By Rusty Lugo

Office users usually turn to subleasing for different reasons. Maybe a company has outgrown its space, needs to relocate in order to attract better talent, has found itself in a situation needing to cut costs or the space no longer meets its needs. Lease rates continue to increase. It is possible to have office space on which a tenant pays below market rents.

If a company no longer needs all of its space, it instantly becomes an excellent candidate for subleasing. But does the primary landlord get to share in any of those profits? A licensed real estate professional can evaluate options on a case to case basis, but negotiations can be made on behalf of the tenant with the landlord to find a well-qualified subtenant, which isn’t always easy.

Good tenants come in two flavors. The first one is a strong company that will cause a landlord to simply release the tenant from liability for its office space. The second is a company that needs space quickly and doesn’t have a lot of money to spend. This type of tenant is more likely to work with the space in its “as-is” condition, reducing what the current tenant needs to spend on facility improvements.  Typically, the sublessor is very motivated to execute a sublease. Once the necessary approval from the primary landlord is granted, tenants can usually complete a sublease deal quite quickly.

Fast occupancy is beneficial since vacancy is expensive with short-term leases. For example, with 24 months remaining, one month is 4% of your total potential income, which brings the next critical point– time on term.

Time on Term

Quite often subleases are short-lived since only the remaining lease term remains.  Is there limited time (12-18 months) left on the lease term?   Maybe a steep rent discount would lure a sublessee to this type of transaction.  But who wants to move in a year?  And who wants to pay those high direct rates after the sublease term expires?  A rapidly growing company could be in a position where they are “busting at the seams” and need to move quickly.  Since they are growing, they may also be comfortable with the nature of a short-term sublease.

But keep in mind, how space lays out and how easily, or uneasily, it is to divide.  A tenant can keep the desired space they would like to occupy and then secure a subtenant to help pay occupancy costs. However, they may need to split the space. A demising wall is not too expensive.  An architect or space planner can ensure dividing the space will still meet any local requirements for ingress and egress.

Remember that the cost associated with finding a subtenant may cancel out any income received from the sublessee. A Licensed real estate broker can guide this process. Tenants should remember a sublease is not the only choice available–negotiating a buy-out of the lease is another option. However, that is another discussion.

Office space users should capitalize on current market conditions, dust off their leases, read the details to be clear on what the lease allows and go secure that sublessee!

Rusty Lugo is Senior Associate at Coldwell Banker Commercial  Advisors