Austin’s office market has not seen this much sublease space on the market for more than a decade. Just recently, vacancy rates were hovering around 5-10%. I believe the market is actually closer to 30 percent vacant if you account for sublease space now on the market. Companies with leases expiring in the coming year can almost always improve their bottom line by considering moving or renegotiating with the current Landlord. For many still under contract in an expensive lease agreement, but with surplus space, the sublease disposition process is often a rough road.
Every tenant’s particular situation is different and is unique. Relocation or lease negotiation depends on business size, image consciousness, proximity to clients and employees, budget parameters, lease security, build-out requirements lease terms and market timing.
Subleased space is typically much less expensive than space leased directly from landlords; sublease terms are generally shorter with less emphasis on subtenant’s credit. Typically sublease space is highly discounted and furnished.
If you have space for sublease, here are seven steps to follow in order to protect your time, efforts and investment when preparing to sublease space.
1. Read your lease carefully:
Review your lease and make sure that you have a right to sublease or assign and make sure the landlord will approve a sublease.
The landlord must approve any sublease and may even provide you with a document. Don’t present a potential sublease document before you have vetted it with your landlord. You cannot obtain approval for the sublease if the landlord won’t consent to your proposed sublease requires and most agreements take 30 days for approval. Time is money — use it wisely.
2. Marketing& Advertising:
Market the space to your fellow tenants and brokers. Make sure your broker utilizes mass broker emails, lists the space in the CoStar, Loopnet.com, LinkedIn and uses any other available opportunity to sell your space, perhaps even banner signage.
Visit tenants in the building and surrounding areas and let them know there’s space available in their immediate vicinity.
3. Aggressively pursue Subtenants who are showing interest:
People who are in the marketplace for space want to see your particular opportunity.
How do you know they’re in the market? You don’t — but brokers do. Even if they aren’t clients of ours, a good broker will know who is in the market for space.
Be aware that landlords generally don’t want government offices, call centers, medical users, or schools of any sort. Landlords typically have the right to be subjective on what kind of business they approve on a sublet, but are usually reasonable given the potential sub-lessee’s financial wherewithal. Review your current lease and identify if certain businesses are precluded; then advertise and market to the rest.
4. Have flexibility on different sublease structures:
Have a great understanding of your lease and options and the different between a termination, buyout, sublease, and assignment? In a sublease, you are still responsible for making the rent payment in full. If you get the landlord to agree to an assignment, the assignee has stepped into your role as the new tenant. You’re typically done.
In any number of markets, tenants could get more cash for their space than they are paying by subletting. In Austin, the chance of this happening is slim to none. There’s just too much available space.
A landlord has the right to terminate a lease if it’s put it up for sublet. This is called recapture. He or she also usually has the right to get some, sometimes all, of any overage on a sublease minus any expenses the tenant incurred for marketing, commissions, tenant improvement and/or legal fees.
Understand the different transaction types and calculate your prospective costs before finalizing any deals. Tenants must determine costs of rent, commissions, overages, loss, and tax implications in a sublet/space disposal situation.
5. Review financials:
Make sure the proposed subtenant has the financial capacity to pay the sublease payments. If you do not have a qualified Subtenant the situation could get substantially worse.
6. Submit for approval to your Landlord
Typically Landlords require 30 day for approval. What can be done to speed up the process? Stay ahead of the curve and submit detailed paperwork required under the lease. Submit the previously promulgated sublease to the landlord for their approval.
7. Complete the transaction
By pre-handling objections and putting a process in place which facilitates immediate decision making, we minimize blind alleys and focus on probable transactions. The result is disposing of the space in the least amount of time and at the lowest cost. Remember, the first lease loss is often the least loss. If you want to cover any part of these sunk costs, you must price your sublease space to move