As the downturn in the oil & gas industry intensified through 2016 the Houston office market saw huge swaths of sublease space come available. Much of the nearly 12 million square feet of space was consolidated among several large blocks leased by industry heavyweights including Conoco Phillips, BP, Shell, and others. Many companies we meet with are interested to learn about available sublease spaces and eager to understand if they should be taking advantage of these opportunities.
If you are considering a sublease space for your business here are some things to consider:
Advantage: Full Floor Tenants
With so much of the sublease market coming from large corporate users, the most enticing opportunity comes in half and full floor increments. It is cost-prohibitive for these companies to re-configure a single tenant floor for multi-tenant use. They would much prefer to lease an entire floor to one user, or if necessary, make smaller modifications to allow for two half-floor users in the space. In a market with so many full floor sublease vacancies there is no shortage of opportunity to secure an aggressively-priced space for several years.
One of the key factors to consider when reviewing a sublease space is the amount of term remaining on the sublessor’s lease. Generally speaking, the longer the remaining term the higher the asking rate for the space. Spaces listed for sublease with less than 18-24 months remaining term are less attractive and therefore command a lower price point. Companies considering these spaces are understandably not excited about the idea of moving again in less than 2 years. There can be opportunities to “blend and extend” under this scenario, but we’ll save that for another discussion.
Space Layout and Configuration
Another important item to consider when looking for sublease space opportunities is the layout and configuration your company requires. The more flexible you can be with regard to the layout and specific needs within the space the more likely you will be able to find something that works for your needs. A sublessor is unlikely to spend cash for construction build out for a sublease so any major changes will be an expense to you as the sublessee. Keep this in mind when reviewing floor plans and touring sublease spaces.
The Price Gap
Companies fortunate to secure aggressive sublease pricing may want to double check the building’s direct asking rates before signing a lease. Unless you can afford those direct rates when the time comes, you will be forced to consider another relocation to avoid the steep increase in rental expense. If the prospect of moving again at the end of the sublease term is acceptable, or if the building direct rental rates are within budget, subleasing in that location may be worthwhile.
In summary, companies can find competitive deals on the sublease market, but need to consider factors such as remaining term, layout, and direct asking rates before making the decision to lease. Larger firms will have the advantage here especially in a market where large corporate users are vacating full floors. There can be opportunities to acquire furniture and other fixtures/equipment at low to no cost as well which can make subleasing an attractive option. If these factors align with your company’s real estate strategy, and the timing of your lease expiration coincides with a plentiful sublease market, you may find these a viable option to consider.