Between telecommuting, labor shortages, and the global economic slowdown, the pandemic left millions of square feet of vacant office space around the U.S. As a result, many companies, desperate to recoup some operational costs, began offering their unused space for sublease. In fact, the U.S. office sublease inventory grew by a staggering 80% since March 2020. This, however, created an excellent opportunity for a slew of other office users looking for more options and flexible lease terms.

 

While subleasing may have become more attractive than ever due to the large inventory available on the market, organizations that are considering taking over an existing lease should evaluate carefully both the benefits and the pitfalls before signing on the dotted line. Let’s take a look at some of the pros and cons of subleasing in more detail.

 

Benefits of Subleasing

  • Access to previously unavailable space – the large sublease inventory will give some organizations the opportunity to lease space that may have been previously inaccessible to them. Maybe the building they were interested in was already fully leased, the rental rate was too high, or the lease included other prohibitive terms. Subleasing opens the doors to new space opportunities, literally.

  • Below market rental rate – the original tenant offering the sublease is still responsible for paying rent, whether they use the space or not. Therefore, they would be willing to sublease at a lower rate in order to offset as much operational cost as possible, as soon as possible. Lower rental rates are actually one of the top reasons why subleasing works.

  • Shorter lease term – a tenant usually finds themselves with excess space well after they have signed their lease, therefore, the sublease term they offer would be shorter than most traditional leases. The sublease term would typically be drafted to coincide with the lease expiration of the original lease. Depending on how desperate the original tenant is, they may even consider offering a short-term sublease, even if the original lease expiration date is well into the future.

  • Buildout savings – companies looking to sublease can oftentimes save on tenant improvement costs. If the existing tenant’s buildout and furnishings are suitable for the sublessee, they won’t have to spend a dime on outfitting the space before moving in.

  • Faster move-in – as a direct follow-up to the previous benefit, subtenants can also move into their new premises much quicker. Since no further space improvements are needed, there won’t be any time wasted on planning, permitting, and construction, which can take months.

  • No guarantee required – subleases typically don’t require corporate or personal guarantees, which may have been another barrier to traditional space leasing for certain tenants.

 

Disadvantages of Subleasing

  • Restricted lease terms – when subleasing their space, tenants can only offer to the sublessee what is already covered in their original lease. For example, if the original tenant has 20 dedicated parking spots, they can only offer those to their sublessee. This may present a number of limitations for the subtenant and may make finding a suitable sublease space more difficult.

  • Uncertain renewal options – as we mentioned earlier, sublease terms are usually drafted to terminate with the original lease expiration date. Even if the original lease includes a renewal option, the original tenant will most likely prefer to vacate as soon as their lease expires rather than continue subsidizing the difference between what they owe the landlord and what you pay them for another lease term. If you like to remain in the space, you may want to negotiate a new lease directly with the landlord, but make sure to approach them early enough to ensure they haven’t signed another lease. Also, be prepared to pay a higher rental rate.

  • No buildout allowance – subleases rarely include any tenant improvement allowance and the new tenant usually just takes the existing space “as is.” If any new construction or repairs are needed, the sublessee is expected to pay for those out of pocket.

  • Original tenant default – the worst-case scenario of subleasing could occur if the original tenant defaults on their lease. This may result in the eviction of the subtenant as well, even if they are up to date on rent payments and have honored all other lease provisions.

  • No direct landlord – when subleasing, you have no direct relationship with the building owner. Your “landlord” is technically the original tenant and you need to coordinate any requests and issues with them. Be cautious that this may turn into a headache as the company you subleased from is only looking to save money and not really to run a landlord business.

 

If subleasing sounds like a new opportunity for your organization’s real estate strategy, you should consider contacting our experienced tenant reps at iOptimize Realty®. We can help you find the best sublease options in your market of choice and ensure that any sublease agreement you sign includes the most favorable terms while minimizing the risks to you as the subtenant.

 

Here are a few other articles we think you'll enjoy:

7 Advantages to Having Suburban Office Space

7 Tips When Transitioning From a Home Office To A Physical Office

5 Reasons Why Companies Are Fleeing CA and NY for FL and TX

 

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