Many tenants decide to sublease their space as a money-saving strategy, and that has become especially true with a record 212 million square feet of office space now available on the sublease market.
Subleasing is the act of transferring a portion of your rental rights to another party for a period of time. A tenant may either sublet part of the premises while they continue to occupy the remaining space or sublease the full premises for a period of time or until the lease term expires.
Evaluating your space needs is the first step before deciding between downsizing, expanding, a lease buyout, subleasing, or any other option. If you’re considering subleasing your office space, read on to learn what trends are driving the market and how you can act accordingly.
The surging interest in remote work and flexible schedules continues to significantly affect demand for office buildings, while also influencing the risk premium on office real estate for investors and developers. With workplaces transitioning to online spaces, the physical office is going through a transition as an asset class. The work-from-home trend is impacting supply and demand dynamics for all parties. Subleasing will face headwinds because of the abundance of space and lack of demand during this transition period.
Most economists agree, there are growing signals of a recession and weakened economy over the next few quarters. This typically results in layoffs as organizations look to manage expenses. When companies launch aggressive layoffs, office space that is available for subleasing surges. Experts at Stanford University say downsizing presents a greater threat than the growing work-from-home trend. Many tech companies grew too quickly during the pandemic, and the current slower economic environment has forced them to shrink just as suddenly. Companies are subleasing a third, and even half, of their office space as a solution.
Across the country, lease economics might suffer outside of prime locations. As remote working trends and layoffs rise in prevalence, cash flow growth will be challenged in the office space market. We’ve also seen a number of markets experience record-high vacancy rates. For example, San Francisco’s average office vacancy rate is 15%, compared to an average office vacancy rate of 6% pre-pandemic. Most central business districts are experiencing the same headwinds and high vacancy rates.
High vacancy rates indicate an overflow of unused or unneeded space as companies downsize or move to remote work environments. Given the dynamics mentioned above, the decision to sublease space, at this moment, does not necessarily mean you will realize success in finding a subtenant to backfill your organization's space.
If subleasing your unused office space is the best path for your company to take, it’s important to prepare a plan of execution. Following these steps can position your company for a successful sublease agreement.
1. Speak with a real estate advisor. They will help you identify your unique needs to determine whether or not subleasing is the right option for you.
2. Create a sublease listing agreement. Your advisor will draft a sublease listing agreement for your review and signature.
3. Confirm the sublease floor plan and take photos. Meet with your advisor to tour the physical space and take photos for marketing purposes. Your advisor may also ask for a key fob for access during scheduled tours and ask you to determine what office supplies and furniture will come with the space.
4. Publish marketing materials. Once your advisor has finalized the approved marketing materials, your listing will be posted online and emails will be sent to the brokerage industry.
5. Promote your listing. When you partner with a real estate advisor, your listing may be promoted in weekly newsletters, via social media, and directly to local brokers.
6. Negotiate proposals and secure landlord approval. When you start to receive proposals, your advisor will work with you to negotiate and reach an agreement. Once finalized, your advisor will support your lawyer to draft any documents and secure landlord approval.
Subleasing may help your company save on costs by optimizing your unused space—especially during a time of shifting work environments and increased layoffs. Ultimately, your real estate advisor can help you decide if subleasing is the best fit for your needs.
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