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News & Insights

Subleasing Sparks Opportunity

  • March 25, 2021
News & Insights

Subleasing Sparks Opportunity

  • March 25, 2021
It may seem like the pandemic has left a lasting impression on the U.S. office market with low absorption rates and many employees working from home, but everything isn’t quite as it seems. John Adams once said: every problem is an opportunity in disguise. In this case, we are talking about the opportunity in subleasing.

Subleasing is when a primary tenant leases out all or a portion of its unused office space (or direct lease) to another tenant. The national office vacancy rate peaked at 17.1% at the conclusion of 2020 with millions of square feet temporarily empty, but not contractually vacant. Previous stay-at-home orders, reduced workforces, and decreased revenue streams have put pressure on physical occupancy and resulted in subleased space increasing 55% over the past 12-months and topping 188.2 million square feet. Nearly 21.2 million square feet was added in Q4 2020 alone. With the increased availability and distribution of the COVID-19 vaccine, recovery appears to be imminent and the sublease market has the potential to be a win-win for all parties involved.

Benefits of Subleasing

The most obvious benefit for a tenant entering a sublease agreement is the allure of lower rent prices: sublease space at Class A office properties in prominent business districts are estimated to be discounted by an average of 23.9% compared to direct leases.  This is due in part to sublease vacancy and new competing office product. The savings is not just money in their pockets but is also an opportunity to migrate to a top-tier property and the associated benefits without the heavy price tag. Additionally, subleases are flexible in nature with short-term commitments.

There is still uncertainty about what the future of work will look like, including telecommuting policies, and many companies are unsure of how their office space needs may change going forward. “Most organizations recognize that there is a shift in the way work is going to get done,” said Julie Whelan, head of occupier research for the commercial real estate firm CBRE’s Americas division. “They have recognized it, and no matter how traditional they are about their views, they understand that there is going to be a level of flexibility that they now have to contend with, in terms of office planning.”

While many companies like the Midwest law firm Fredrikson & Byron, who recently leased approximately 178,000 sq. ft. at KBS’ RBC Plaza at 60 South Sixth, are not planning to reduce office space long-term, there is still consideration for hybrid in-office and work-from-home set ups for the next several months. For existing or primary tenants, leasing out a portion of their office footprint creates flexibility that can help buffer some of this uncertainty because it allows them to temporarily downsize space and have part of their rent paid without the potential risk of lease termination penalties. They can also reclaim that subleased space for future use when needed again.

Landlords and Subleasing

For landlords, gaining new long-term tenants in today’s leasing environment can be challenging as many tenants are still hesitant to make major office decisions or changes until office use becomes more consistent and comfortable for employees. Subleasing is a great alternative to keep buildings leased and cash-flowing without the added expense of trying to locate a new tenant along with improvement allowances. While landlords typically are not involved in subleases (these transactions typically occur directly between tenant and sublessee). When the market stabilizes and office-using employment resumes, the potential to turn these subleases into expanded and full-obligatory direct-lease agreements may be ripe for the picking and will help the market rebound faster. Many experts also predict the coworking/flex space trend to be stronger post-pandemic because of the realized value of a remote workforce. The COVID-19 crisis has shown us that some professions thrive on a telecommuting model and can easily tap into talent pools across many states, making coworking space hot in demand. Studies suggest coworking and flexible space will at least double within the next five years. But don’t be misled: the need for physical office space will continue to be a priority for many businesses to operate and maintain culture, a critical component in the workplace.

As we look ahead, the influx of sublease space is simply a byproduct of the crisis and will eventually wane. But for now, it offers revenue-producing opportunities, or at least offsets rental fees, to help the office sector and its users navigate uncertain conditions and keep businesses running.

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Industry Trends

Underwriting the Perceived Instability of Short-Term Office Leases

  • February 16, 2021
The threat of shorter office lease terms has been looming over the commercial real estate industry for several years. Companies first braced for the potential impact of new standards from the International Accounting Standards Board (IASB) recognizing all leases on the balance sheet, which took effect in January 2019. Then, the office leasing world was hit with additional challenges from COVID-19 as many companies opted to work from home and re-evaluated the role of their physical office space.
Industry Trends Insights

Envisioning the Future of the Built Environment

  • January 29, 2021
Amidst the ongoing crisis, built environments are at the front lines of change and will play a huge role in creating a more resilient world going forward. Office architects are re-envisioning the future of the workplace—where and how we work. Unfortunately, there is no crystal ball to predict exactly what the new future-oriented office will look like, but what we do know is flexibility and adaptability will be key in resilient design.
Industry Trends

Why Texas is becoming a commercial real estate powerhouse

  • January 21, 2021
It looks like 2021 will be another big year for Texas, a year when a lot of major companies will make the jump and move to the Lone Star state. Just look at these transitions:
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