Many commercial real estate owners are assessing the impact of the large amount of sublease space that has been returned to the market this year in Boston’s suburbs.
The first wave of sublease space was placed on the market by Internet companies and other venture backed firms who initially leased extra space in anticipation of rapid growth that did not materialize.
The second wave of sublease space has been fueled by larger technology companies that are reacting to the national economic slowdown, the reduction in technology expenditures, and pressure from the capital markets, which has caused stock prices to plummet. New sublessors include companies such as Cisco, Lucent, Nortel, EMC and State Street Bank.
In March of 2001, there was approximately 2.2 million square feet of office space for sublease in the suburbs. Today, the sublease inventory has increased to about 3.0 million square feet. Sublease space now constitutes over a third of the overall suburban vacancy rate of 12.6 percent.
The submarkets most impacted by the spike in sublease space include those some of those same submarkets that enjoyed the most rapid rent increases during the Internet bubble of late 1999 and the first three-quarters of 2000. For example, the Route 128 West and Route 128 North markets saw rents increase between 50 and 65 percent during this frenzied period. Rent increases in some buildings topped 100 percent. Owners in these two submarkets now have to contend with the more than 1.9 million square feet of sublease space.
The good news for owners is that, by and large, tenants seeking subtenants are continuing to pay rent. Additionally, lease and tenant related issues make much of this space difficult to relet. These challenges include short sublease terms, uncertain sublessor financial condition, inability to fund tenant improvements, lack of renewal options and other onerous lease provisions.
Owners can be successful in today’s sublease-burdened market by recognizing and positioning themselves for the following:
* Be Realistic. Owners must recognize the competitive pressures and propose business terms that reflect today’s market when competing for tenants.
* Communicate. Stay in touch with those subleasing tenants and their brokers to keep a pulse on their motivation level for advantageous buyout terms once a tenant is identified.
* Get A Written Agreement. Negotiating a written termination agreement in advance that sets guidelines for termination terms if owner sources a tenant for the space. This is especially important when the building is otherwise full, or if there is a limited term left in the sublease. This allows the owner to be responsive to other tenants, without the need to negotiate each time.
* Make Tenant Improvements. Most tenants will require fit out work. An owner’s ability to provide funds for those improvements is an important advantage in a capital-hungry economic environment. The ability to offer a renewal option is also paramount to allowing a tenant to feel comfortable investing in space.
* Get a Non-Disturbance Agreement. Most sublessees will request this and many owners refuse it. Be creative about negotiating concessions from the sublessor for granting this important non-disturbance agreement.
* Have a Good Reputation. A historically responsive owner with a strong property management track record can leverage their reputation to compete for savvy tenants who recognize the value of a direct relationship with a property owner.
* Try the Turnkey Approach. Owners are much better equipped to provide a more streamlined space solution. They can easily offer space planning and coordination of space construction to suit a tenant’s specific needs.
