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New Subleases Will Not Necessarily Drop Rental Rates

Sep 11, 2008 by

The San Francisco Business Times headline, "500 Thousand Square Feet of Office Space Will Be Dumped Into the Marketplace". All of the major financial institutions are shredding office space as they immediately attempt to cut costs. Sounds good for office tenants that will be in the market this year right? Well not necessarily.

So far at the end of the 2nd quarter of 2008, office vacancy rates have remained stable throughout the Bay Area. San Francisco started the year at 7% vacancy and it remains at 7% vacancy. Subleases are not considered in the vacancy rate because landlords are receiving rent from a tenant and therefore it is considered a lease in calculating vacancy rates. If this were the case, then a dump of new sublease spaces would suggest that the real opportunity for tenants is the sublease market rather than try to compete for direct space.

In the last quarter, we have been receiving more calls asking about sublease opportunities then we have had in years. Unfortunately the types of sublease spaces do not necessarily fill the need of the tenants currently in the market.

Our average deal size in San Francisco is 3,200 square feet or an office of 10-15 people. Most of the large financial institutional spaces range from 10,000 square feet on up and can mostly be found in our best class office buildings. It is difficult for a sublessor to try to meet the market by dividing their spaces. This could involve extensive tenant improvement costs to divide full floor spaces and most landlords may object to dividing floors because they want to see these floors remain full floors to attract larger upscale tenants in the future.

Subleases, too, offer some risk. If you sublease from a financial institution that ultimately goes bankrupt or your sublessor fails to make rent payment to his landlord, your sublease could become null and void. If you are able to secure a sublease and well below market rate and this occurs, the landlord may not be interested in continuing your lease certainly not a rate well below market rate.

Remember that rental rates overall will not be reduced unless the overall vacancy rate does go up and landlords feel the necessity to lower rates to compete for fewer tenants in the market. Landlords, often times, have provisions that do not allow discounted subleases to take effect because a number of leases actually call for sublease rates to never fall below market rates in the building.

An experienced commercial real estate broker is your first call to determine how viable a sublease really is against leasing space direct in these uncertain times.

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