Is Considering an Office Sublease Worth the Hassle?
Sublease Space in Houston
The Houston office market has shown weak fundamentals for the last 3-4 years – in large part due to the downturn in the oil & gas industry. During this time the Houston office market saw huge swaths of sublease space come available. At its peak the sublease market topped nearly 12 million square feet of space, a fair amount of which 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 opportunities come 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.
Conversely, for smaller tenants looking for less than 10,000sf the available market of sublease space can be more limited.
So, many tenants have heard about the fantastic deals out there in the sublease market. Let’s dig into the factors at play here.
How Much Term is Remaining on the Primary Lease?
One of the key factors to consider when reviewing a sublease space is the amount of term remaining on the sublessor’s master 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. Of course there are opportunities to “blend and extend” the lease directly with the landlord as well.
Under the blend and extend scenario a sub-tenant may lease the space for a below-market rate, and simultaneously lease additional term with the landlord. The catch is that the additional lease term will be at much higher, market rates. The effective rate for the tenant over the course of the lease is very favorable in this type of arrangement. However, it is important for the tenant to understand the market rates in the building and ensure it will fall within their budget. Many tenants use aggressively priced subleases as a means for entering higher class buildings… only to be forced to move at the end of the term because the escalation to market rates is too high for them to absorb.
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 to find something that works for your needs. A sublessor is unlikely to spend cash for construction build out for a sublease. Often times the sublessor company is experiencing financial difficulty, and not in a position to finance construction work so any major changes will be an expense to you as the sub-tenant. Keep this in mind when reviewing floor plans and touring sublease spaces.
The Price Gap
As mentioned earlier in the blend and extend scenario, the building direct rates are a key component to consider. 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.
Summary
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.