Is It Really a Landlord’s Office Market?

We hear a lot that this is a landlord’s office market, but tenants might have more bargaining power than they think to combat rising rents. According to research from NAI Capital, there is currently more than 5 million square feet of sublease space on the market—including more than 1 million square feet of sublease space on the Westside. The sublease supply paired with a double-digit vacancy rate is giving tenants a strong bargaining chip both when renegotiating leases and when looking for new space.

“Landlords think it is a landlord market, but there are a number of opportunities. I think that this is a tenant’s market because of the glut of sublease space that is coming on the market,” Michael Arnold, EVP at NAI Capital, tells GlobeSt.com. “The sublease space is having an impact. We have one landlord that we are working with that has decreased their rents 15% in the last year.”

Despite the options for tenants, office rents have continued to increase. Landlords in many cases are betting on in-place tenants choosing to pay the higher rent than to pay for relocation and moving costs they would incur by moving, according to Arnold. However, Arnold says that shouldn’t be a concern. “If you move into a direct lease space, the new landlord will likely cover some of the soft costs, because they will give an allowance to cover moving expenses,” he says. “The negative is that you do not get a moving allowance in a sublease space, however, most subleases come plug-and-play. They already have furniture and an IT infrastructure in place. So, there is a give-and-take when evaluating new opportunities in the market.”

Landlords are also betting on tenants not taking the risk that comes with sublease space. “There is a risk associated with leasing sublease space related to the financial wherewithal of the tenant that you are leasing from,” explains Arnold. “You need to make sure that there are no credit issues and that there is a good relationship with the ownership. If you can create a good relationship with the landlord, there is the potential to take out the sub-lessor and do a direct deal with the landlord in the future to mitigate exposure as a subtenant. Any credible tenant rep knows that you need to understand the sub-lessor going into the property. If you aren’t familiar with that sub-lessor, you are putting your client at risk.”

Arnold makes it a point to vet a sub-lessor prior to bringing sublease opportunities to his clients. “There is a credit risk to go into t sublease space, but I understand the credit risk before I client in the situation to even look at an opportunity,” he adds. “I know that the risk is going to be minimal before I show my client the opportunities.”

More sublease space will hit the market this year, increasing the bargaining capacity for tenants. “I think there could be 500,000 square feet of sublease space coming onto the market this year,” says Arnold. “I think that as landlords see the market being frothy, people are going to make the decision in the best interest of their business. There are going to be companies that over spend because they can afford to, and that works for their business. Then, there are going to be those that make economic alternatives and evaluate how they are utilizing their space.”