Leasing

Subleasing Solutions

Use These Strategies to Effectively Market and Lease Excess Space.

A year ago sublease space decimated the national office market occupancy rate, yet the trend appears to be waning. After reaching its peak of nearly 25 percent of the national vacancy rate in first-quarter 2002, sublease space has slowly but steadily declined, according to Torto Wheaton Research.

However, sublease space continues to be a vexing problem, especially for downsizing companies that no longer have enough employees to fill their offices. How can commercial real estate professionals help their clients fill their surplus space? Leasing experts offer their solutions.

Determine the Right Price

The key to subleasing is to make sure your clients are very well attuned to the price point at which they need to make a deal, says David A. Morris, CCIM, SIOR, a principal and vice president at Colliers Turley Martin Tucker in St. Louis. “Don't [let your clients] play hard to get. [They] must understand that time is more valuable than rate per square foot.”

Daniel J. Tichio Jr., CCIM, agrees: “Every month you play cute you lose money.” Tichio, vice president of Impact Realty Associates in Hackensack, N.J., suggests sitting down with clients and figuring out exactly how much they need to make from the sublease rent.

Sublessors need to set themselves apart by pricing lower than direct space, although pricing too low can be detrimental. “The downside at the end of a sublease is a huge rent increase,” says John “Dede” Malmo Jr., CCIM, president of Malmo Memphis Real Estate in Memphis, Tenn. If the rent increase is too big, “lots of [potential sublessees] aren't willing to go through the hassle for a lower rental rate,” he says. For example, a tenant in Memphis' nicest class A office property has been trying to sublease a corner office for half the asking rent, but it's been on the market for more than six months, he says.

If your clients gave their landlords personal guarantees, they also should obtain the same guarantees from sublessees to avoid dangers such as sublessees terminating leases or not paying rent on time. Although subleasing relieves your client of current cash flow constraints, “the reality is that being a sublandlord is a problem,” says Steven J. Kaufman, CCIM, director of real estate for Siemens Corp. in Livingston, N.J.

Target the Right Prospects

A marketing blitz is vital, but to be successful it must reach the types of companies that are looking for sublease space. “I've had lots of success with direct mailing,” Tichio says. “Open houses aren't that easy because everyone is having them right now.”

Companies interested in subleasing are those that can move frequently and adapt to different layouts, such as administrative-type offices, says Quentin D. Dastugue, CCIM, chief executive officer of Property One in New Orleans. Also, seek out class B tenants because you can offer them class A space at class B rates, he advises.

Offer Incentives

To make your client's sublease space stand out from the rest, emphasize the lessee's perks, such as prime parking spaces and cafeteria discounts, Dastugue says. Also, offer additional space at no cost: If your client has 10,000 square feet to sublease, offer the entire area to an 8,000-sf user because it's not cost-effective to break up the space. He also suggests providing equipment and information technology backbones that small tenants can't afford.

Since sublessors can't offer incentives such as tenant improvement allowances, advise your clients to get creative. One of Morris' clients was subleasing space across from the Missouri Athletic Club in St. Louis; he offered to pay for the sublessee's membership for the lease's duration.

The Benefits of Being a Sublessor

Commercial real estate professionals who have clients seeking space should investigate the sublease market. “Subleasing is a good idea because you get better space in shorter term with improvements already in place,” Kaufman says. (For tips on negotiating a sublease, see the sidebar “Five Steps to a Safer Sublease.”)

Brokers would be wise to investigate the sublease market for both their clients and themselves. Dastugue's company has been subleasing space in New Orleans for 11 years.

“We started out in the suburbs, but then moved downtown in 1989,” he says. Property One leased CB's (now CB Richard Ellis) former $21-per-square-foot space for $9 psf. “It had all of the cubicles and some furniture,” he says. At the end of the lease the landlord wanted the company to renew for $18 psf, so it moved across the street into 8,000 sf at $11 psf for four years, but the sublessor had the right to take the space back a year early. It did, so Property One moved again, into its current 10,000-sf space at $9 psf. “It's class A space, great views of downtown, and big private offices,” Dastugue says. At a time when New Orleans class A asking rents range as high as $16 psf, that's not a bad deal.

Gretchen Pienta

William T. Adams, CCIM, CRB, is owner of Adams Realtors in Atlanta. Contact him at 404.688.1222 or wtadams@ccim.net.Gretchen Pienta is associate editor of Commercial Investment Real Estate.

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