12/22/2008
Subleasing Gives Tenants Bargaining Power
By now it’s no secret that the slowing economy has created a host of challenges that, in one way or another, have affected everyone. But now, it’s starting to affect commercial property owners in another way—subleasing.
As companies have downsized, so has the amount of space they need to operate. Yet, these companies are locked into rental agreements with the property owners, so what are they to do? Many have simply let their leases expire and then sought out smaller quarters, while others have opted to sublease their unused space—often for a much cheaper price. This has resulted in a spike in the amount of vacant office space available throughout the country.
What effect does this have, then, on office markets and commercial real estate as a whole? For one, it means there’s a lot more competition out there to get space rented out. Property owners are forced to compete with the tenants who are subleasing their space—which can mean offering built-out space as opposed to putting the responsibility of building out a space on the tenant. After all, the sublease properties often come with furniture and even phone and internet systems for a fraction of the cost.
Landlords don’t really need to worry about existing tenants, as they are bound to continue to pay rent until the end of their lease. The real concern involves what happens to those spaces after the lease runs out. The prospective tenant really has the advantage and bargaining power in a market where subleases are so abundant. To keep spaces filled, landlords will need to make more concessions than in recent years and offer exceptional customer service to really make it worth the tenant’s while, and dime.
Keeping these properties occupied is especially important to the property owner, as the revenues generated from the rentals often goes right into paying the mortgage on the property. If spaces become vacant, not only might there not be enough income to cover the mortgage payment, but it will be difficult to refinance the property later. If a lender sees that the property is not self-sufficient, they may be reluctant to make a deal—especially if the property owner has credit issues or any other financial challenges on his or her record.
Given this trend of accumulating office inventory, property owners really need to change their perspective on leasing. Whereas a few years ago, the landlord had the upper hand and could focus on making a profit and be selective with his or her tenants, the tables now have definitely turned. It is now up to the landlord to give a little more to attract tenants and keep their spaces occupied. It’s less about making a huge profit and more about making wise decisions to stay afloat during this stressful economic period.