After reaching its peak of nearly 25 percent in the first quarter of 2002, the national office vacancy rate for sublease space has slowly but steadily declined, according to Torto Wheaton Research. Sublease space continues to be a vexing problem, especially for downsizing companies that no longer have enough employees to fill their space. Let's examine some strategies to aid these situations.
The key to subleasing is to make sure you're quoting a rate tailored to make a deal happen. One has to remember that in these situations, time is more valuable than rate per square foot. Every week you wait for a better price, you've lost money you'll never have the opportunity to make back. Sublessors need to set themselves apart by pricing lower than other direct space, although pricing too low could be counter productive. Some subtenants might view a huge rent increase at the end of the term as a detriment that makes the whole process not worth it when they're looking for a long-term tenancy. But for most, subleasing is a good idea because you usually get better space in shorter term with improvements already in place.
Offering the whole space to a subtenant when they only need-and will pay for-say, 80 percent, is one way to attract a sublessee's attention. Leaving office cubicles or warehouse racking also is appealing to potential subleases. Paying for other pass-through costs like real estate taxes or common area maintenance can sometimes be enough incentive to make the deal happen. You have to be willing to make creative sacrifices to make your space more attractive than others on the market.
What to be Careful About
On the surface, subleasing appears to be a good option for tenants looking for a space that works for them. Yet subleases are fraught with potential problems. Follow these five simple, yet essential, strategies to help protect you when negotiating to rent sublease space.
Pay sublease rental payments directly to the landlord. Relying on the sublessor to make your rent payments is a risky proposition, so it's critical that you pay the rent directly to the landlord. In addition to making sure the payment ends up where it should, doing so builds credit with the landlord, which will come in handy in the event the sublessor is no longer able to pay its part of the rent or if the sublessee wants to do a direct deal at the end of the sublease.
Stay in the communication pipeline. Knowing what's happening between the landlord and lessee helps avoid problems such as an unexpected dispossessory notice. Therefore, insist you're copied on all communication. Also, state in the sublease agreement that the landlord is authorized to release information to the sublessee. The sublessee should communicate with the sublessor and the landlord on a regular basis, so he's aware of potential concerns before they become problems.
Obtain the sublessor's financials. Examining the sublessor's financial statements might provide information about the viability of entering into the sublease. Not doing so may place you in a situation that costs time and money.
Get first right of refusal. Employ language in the sublease giving the sublessee first right to lease the space directly from the landlord if the sublessor either terminates or defaults on the lease. This virtually eliminates the possibility of another tenant leasing the space in such a situation.
Get an option-to-lease clause. Similar to the previous strategy, negotiate an option-to-lease clause with the landlord at predetermined rate and terms. Therefore, if the sublessor defaults, the sublessee can lease the space directly from the landlord, possibly at a below-market rate.
The sublease market is changing; many real estate professionals agree sublease availability is shrinking rapidly. But until this market subsides, employing these strategies gives you confidence in subleasing decisions. IBI