According to Loopnet, in the first quarter of 2023, the commercial real estate market had 210 million square feet of subleased space available, comprising 2.5% of the total available space in the market. In many areas, twice as much subleaseable square footage is available now than even during the Great Recession in 2008.
It’s clear that subleasing office space is an increasingly popular solution to everything from downsizing to workplace flexibility and future expansion. Here’s what you need to know before subletting your office space.
Reasons to consider subleasing your space
The subleasing market has changed significantly in recent years– not only growing to historic levels, but growing for different reasons.
Subleasing to reserve office space for future expansion
Traditionally, subleasing has been seen as a smart way to prepare for scaling your business by moving into a space that is larger than what you need, and then subleasing extra office space to offset costs associated with future expansion. Smaller startups like the shorter lease terms and affordable spaces, and subleasing excess space allows you to right-size your real estate portfolio while giving you the flexibility to scale your office space as your team expands.
Subleasing to offset downsizing
Prior to 2020, one of the most common reasons for subleasing unused office space was to allow growing businesses to secure space for the future, but today, it’s just as possible to see a company lease office space with plans to downsize. New work-from-home policies, hybrid schedules, and reduced staffing, along with progressive work policies like desk-sharing and job-sharing, are common catalysts for subleasing office space. Subleasing can help you save money from unused space.
Subleasing to fulfill original lease obligations
If your current space and landlord are unable to meet your expansion needs, but you can’t wait until your lease expires to move, then you may choose to vacate the property and sublease your entire space. This allows you to relocate and upgrade, and offsets the associated costs of a new office space while still fulfilling your lease terms.
Definition of a sublease
In a sublease, you (the sublessor or original tenant) sublease your office space to a subtenant (or new tenant). You can sublease all or part of the space. As the sublessor, you carry the role of both tenant and landlord. You continue to act as tenant to your original landlord under your original lease agreement–paying rent payments and fulfilling other obligations as outlined in your lease agreement– but you also assume the role of landlord for your new tenant, since you are responsible for that tenant leasing office space from you.
As sublessor, you’ll typically use a broker to market the space you want to sublet, set the terms of the sublease, evaluate potential subtenants, and collect rent from subtenants. Sublessors must also communicate with their landlords to ensure subleasing activities are in alignment with their original lease terms.
Pros and Cons of subleasing
As attractive as it may sound to monetize unused office space or get some wiggle room on your lease, it’s important to weigh the pros and cons before you take the leap and sublease your office space.
Pros of subleasing space
- Attractive to new tenants- Subtenants enjoy the less expensive, shorter lease terms of subleases because they’re saving money by being in a right-sized office space.
- Offsets costs of downsizing or relocation- A sublease can help you save money, even if you need to downsize or relocate.
- Creates profit potential- While most sublease rents are below leasing rates, hot markets can demand higher rental rates for prime office space, which could mean a tidy profit for a sublessor.
- Facilitates flexibility in relocation- Acquiring a new tenant can allow you to relocate to a new office space without breaking your lease.
- Accommodates scaling- If you expect to expand, you can lease a larger space and sublease excess space until you are able to fill it.
- Provides networking opportunities- When one business sublets from another, proximity may provide opportunities for employees across industries to connect.
- Promotes positive business relationships- With the ability to choose your subtenants, and you can find businesses with services and values that complement your own.
Cons of subleasing space
- May be restricted- Leasing agreements often include subleasing restrictions or conditions, like profit sharing or recapture clauses.
- Costs more upfront- Much like leasing, subleasing may require remodeling and staging office space, marketing fees, listing fees, and brokerage commissions to secure a new tenant.
- Does not guarantee breaking even- A drop in rental rates might mean you may not get the leasing price you’ll need to cover the full rent of the subleased office space.
- Can take time- Again, just like a typical lease, it can take time to secure a renter. Make sure you can afford to pay your full lease amount until you sign a subtenant.
- Places landlord responsibilities on you- As the sublessor, you are responsible for collecting rent and covering any damages incurred to the property by your subtenant.
- May overwhelm common areas- Parking lots, break rooms, conference rooms, and other shared spaces may become overcrowded with additional tenants.
- Can disrupt business operations- Increased noise, confidentiality concerns, privacy issues, culture conflicts– all can cause snags when businesses share close quarters.
Steps to subleasing
If you do it right, subleasing can be a win-win– for you, your landlord, and your subtenants. Here are some important steps to follow for subleasing success.
- Assess the space you want to sublease. Tenant experience software like VTS Activate can help you gather data on how your current office space is being used. This can help you determine how best to reconfigure your unused or underused office space to accommodate new tenants.
- Review your lease agreement. This is a critical step. Before you work with a broker or seek out any tenants, check your leasing contract for the following:
- Restrictions on subleasing or on your applicant pool: Some leases prohibit tenants from subletting excess space to businesses that would compete with anchor tenants.
- Recapture clauses: Recapture clauses allow landlords to reclaim your property and end your lease early, leaving you without the option to sublease space at all.
- Landlord consent restrictions: Some leases include restrictions on how much time a landlord has to approve or deny a subleasing request.
- Profit-sharing clauses: Some leases prohibit tenants from earning a profit or may require you to share half of the profits with your landlord.
- Have a conversation with your landlord. After you review your lease, this is your next step. Some landlords would rather negotiate with you directly if you’re not using your office space to its fullest potential. It may be possible to downgrade to a smaller unit within your building or they already may have an inquiring tenant interested in sharing the office space. Some landlords may even allow you to break your lease and sign a new lease for only the space you need, so that they can then lease out your unused space.
- Set a budget. Your budget should include funds for renovations, prepping the office space for showing, marketing, brokerage fees, and carrying costs if you can’t lease right away. It’s also helpful to have an emergency fund for delinquent tenants or damages. Remember, even if you are subleasing, you are still responsible for your original lease and the financial obligations associated with it.
- Make the space move-in ready. Stage your office space so it’s primed for tours. First impressions are everything. Tidy loose cords, replace dead lightbulbs, add a few plants, and make sure everything is sparkling clean. Curate a space that prospective tenants would be excited to call their office.
- Specify what’s included in the sublease. This is a task that’s easy to overlook, but be as detailed as possible when creating your listing with your broker and creating your sublease agreement with your attorney. Will existing desks, appliances, or lobby chairs stay behind in the unit? How much will you charge for a security deposit? (This is typically one month’s rent.) Be sure to also include details about shared amenities, utilities, and expectations for the office environment.
- Determine your leasing price. Set correct expectations by researching the latest market trends and checking with nearby businesses. Let your broker guide you by helping you know how long it’s taking on average to sublease space in your area, what you should include in the sublease, and whether office space is in high or low demand. Research typical offerings in your area to make your listing a top choice. Keep in mind that subleased office spaces are typically offered at a lower leasing price than standard market prices.
- Market your property. Don’t try marketing your space all on your own– use a broker. Regardless of market trends, it will always pay for your listing to stand out. Partner with a broker who uses modern technology to feature your listing with quality photos and videos, digital renderings, and clear floor plans. Modern tenants have high standards for listings, and the more information you can provide, the better. A broker can also provide regular reports on your listing activity to keep you in the loop.
- Thoroughly vet subtenants. Be selective when choosing from your sublease applicants as they will affect your office environment. If there are any common spaces included in your sublease agreement, you’ll be officemates, so compatibility is key. Avoid subleasing space to businesses that might detract from your brand identity or have competing interests. Keep industry, clientele, and general day-to-day foot traffic in mind, and if your team remains onsite, refresh your team on your privacy policy.
- Have your original lease ready for subtenants to review. A smart potential subtenant will ask to review your lease to ensure that their sublease is not violating the original agreement. Have a copy of your lease readily available if it’s requested.
- Negotiate a deal. Your broker is your best friend when it’s time to negotiate a deal. Let them help you iron out the details and come to an agreement that you, your subtenant, and your landlord can all be satisfied with.
- Start collecting rent. Once the deal is closed, be sure to have a rent schedule in place to ensure that you can collect rent from your subtenants on time, and are then able to pay your own rent in a timely manner so that you can fulfill your responsibilities both as sublessor and tenant. Research best practices when it comes to tenant experience to ensure your subtenants are happy in the subleased space.
Whether you’d like to downgrade to a smaller space or to move into a larger office, subleasing is a fantastic option to recoup associated costs and to support your business. With a better understanding of the process, you’ll be positioned to take the next step in your subleasing journey, and the VTS platform ensures you’ll benefit from all the latest technology to market your space. 50% of office spaces in the United States have relied on VTS to introduce potential tenants to their units through virtual tours, digital renderings, sharp photography, and defined building statistics.
