COVID-19 Forces Many Companies to Sublease Office Space

Before COVID-19 changed the way we both live and work, all was well for commercial property owners in cities both big and small. Vacancy rates were at record lows, driving up rents and fattening property owners’ pockets.

Today, the pandemic has resulted in many people working from home, reducing the need for office space, with some companies ditching their densely populated downtown offices completely for sprawling suburban space. Because not all of these companies have been able to break their lease, this has resulted in a record amount of subleasing.

Subleasing During the COVID-19 Pandemic

For many companies, subleasing has been an attractive alternative to breaking leases and facing legal battles; depending on the term of their sublease, it also opens the door for them to return to the space once the COVID-19 storm passes. As a result, the amount of office space offered for sublease nationally has increased 14% YTD from 232M square feet to 264M square feet.

Some of the most significant office subleasing increases have come in markets with high technology employment, such as San Francisco and Denver. Tech companies tend to keep extra space to accommodate quick expansion—and then look to release it during market downturns.

Markets with smaller increases in subleasing space tend to have more diversified employment bases, such as Manhattan. Here’s a look at the cities witnessing the largest increases in space available for sublease since the pandemic took the country by storm.

Subleasing in the Years Ahead

While the numbers above may not look too grim, especially in cities with more employment diversification, Moody’s Analytics predicts that national vacancies will continue to rise across the board, moving past historic highs within the next few years. Projections show the vacancy rate reaching 19.3% in 2020 before surpassing the 1991 record high of 19.7% to reach 19.9% in 2021 and 20.0% in 2022.

"Many companies continue to push back returning to the office, with some already planning to telecommute until 2021. Whether the increased availability of remote working infrastructure will have long-term effects on office demand remains to be seen,” said Victor Calanog, Head of CRE Economics at Moody’s Analytics. “However, the long-term nature of office leases means that it may take some time for vacancy rates to reflect the real trend.”

Subleasing Challenges and Opportunities

If a company has unused, available space, subleasing it to a third-party (if the terms of their own lease allow it) is a very attractive option for downsizing their commercial real estate footprint and expenses. However, it’s beginning to pose a problem for some property owners, pitting direct leases against subleases. How so?

With the demand for office space diminishing quickly, many lessees are offering vacant space for sublease at very low rates to beat out other offers and to fill it quickly. This can create a situation where property owners are competing with their own tenants to fill empty space. In these situations, it may behoove the property owner to allow a tenant to break their lease, or consider a lease renegotiation, giving tenants an opportunity to make a clean break or secure a better deal.

Decide Your Next Move with iOptimize Realty®

Are you sitting on vacant space and unsure of your next move? You need a tenant representative on your side to help you sort out your options. At iOptimize Realty®, we work only for you, not property owners or landlords. Whether you want to sell a single property or a large portfolio, sublease some of your surplus space, or do a sale-leaseback, we will market it, find you a credit tenant, negotiate with your landlord, and get you the best possible price.

COVID-19 has been devastating to the country and the world, but if there is any silver lining, it’s that it may have opened the door to new opportunities for your business. Contact us today to learn more about what we can do for you.