Direct Leasing Could Make Subleasing Issues Worse

Real Estate

The amount of sublease space on the market has been growing since the pandemic began. 

In a recent report, CBRE said direct leasing activity in the second quarter of 2020 declined 85% compared to the same quarter in 2019.

“That is a dramatic number,” says Withers Attorney Steve Wilson. “It doesn’t address subleases, but it really does show the chilling effect that everything going on has had on the market.” 

With so much subleased space on the market, Wilson thinks office landlords will be forced to lower their pricing and find other ways to compete.

“I was talking to a landlord, and he was mentioning that he was starting to do short-term leases, which you wouldn’t have seen a lot before this [COVID],” Withers attorney Vasi Yiannoulis-Riva says. “But people are adjusting. They’re trying to ride this pandemic out and see what happens a couple of years down the line. And so they need to compete with this sublease space, which is usually on shorter-term arrangements.” 

The amount of sublease space on the market is putting pressure on office landlords.

“What ends up happening is that sublease space is offered at a discount,” says Yiannoulis-Riva. “If you’re just a tenant that’s looking for something a little bit more short term, in particular, you could find a completely outfitted space. And you can get it at a discount to what a landlord would normally be asking for new or comparable space in the same building.”

Wilson says that office landlords are also offering many incentives, such as 20% discounts for four- or five-year terms. If they can compete on lease length and price, they’re in an excellent position to win the business, according to Wilson. 

“Most space users are going to want a direct lease if they can get it,” Wilson says. “They’re going to prefer that slightly because it’s a whole lot less of a hassle than dealing with a sublandlord.”

The advantages of a direct lease include direct privity of contract with the landlord, according to Yiannoulis-Riva. “As a subtenant, you may not get that,” she says.

The question that remains is when will this space equation turn around? It could take a couple of years. Companies have realized that many of their employees can effectively work from home during the COVID crisis. 

“They [office users] may not need that much space anymore,” Wilson says. “So at a minimum, that’s probably a one to two-year proposition based on the progression of the pandemic and the expectation that at some point there will be some confluence of herd immunity and effective vaccines that will allow people to start going back into the workplace. Between now and then, we may be looking at 30% utilization of office space, which is what our firm is using right now.”

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