The COVID-19 pandemic has caused many companies to view their office space as an albatross. Some have tried to break or alter their leases, while others have turned to the sublease market, leading to a massive influx in supply. According to a recent report by Cushman & Wakefield, sublease space in the first quarter of 2021 accounted for more than 30% of inventory in places like Manhattan, Austin, and Toronto, while San Francisco’s reached an astonishing 50.4%.
Given this backdrop, you’d be hard pressed to envy brokers tasked with marketing sublease space. Yet some have succeeded despite the glut.DON'T OVERLOOK THE OBVIOUS: OTHER BUILDING OCCUPANTS
Arthur Draznin, principal owner of Draznin Real Estate Advisors in New York City, emphasizes the importance of contacting every tenant within the building where the sublease space is located. “That is the first rule of a successful subleasing campaign,” he says. “One never knows who may want to expand, and the best place for a tenant to expand is within its own building.” Charles Tatham, SIOR, CEO of Tatham Property Solutions in Paris, also endorses in-building outreach. He recalls a recent effort that led to three neighboring tenants touring a space.DEFINE CHARACTERISTICS OF SUITABLE PROSPECTS
When you’re ready to expand beyond the immediate building, follow the lead of professional marketers, who frequently develop “personas” of target clients. Arlon Brown, SIOR, senior vice president of Parsons Commercial Group in Southborough, Mass., employs analogous methods: He narrows down the list of potential sublessees by defining criteria of likely candidates. For example, he recently marketed a sublease space in a Class B building in Downtown Boston. In his analysis, the space was most suitable for a nonprofit. With that in mind, his team obtained a good list of nonprofits in Metropolitan Boston, identified the president or CFO of each, and got in touch. This process saved a great deal of time and wasted energy.OFFER SPECIAL INCENTIVES
As every broker knows, money motivates. Bert Rosenblatt, co-founder of Vicus Partners in New York City, has observed more firms offering double commissions and $10,000 Amex gift cards. Tatham’s firm is paid out of the sitting tenant’s savings. Consequently, outside brokers do not have to split their fee, and earn “maximum remuneration” on deals. Tatham notes that such arrangements may seem “petty” or “scruffy,” but that they’re “pretty motivating for a broker on commission.”
LEVERAGE TECHNOLOGY, BUT DON'T NEGLECT TRADITIONAL OUTREACH
Lockdowns made it difficult for brokers to offer on-site tours, but technology can provide reasonable alternatives. Draznin advocates online video tours, virtual reality headsets that enable prospective tenants to experience walk-throughs, and 3D visual models. Nevertheless, he stresses that there is no substitute for bringing brokers on in-person tours. If feasible, these can be combined with breakfasts or lunches.
Another low-tech option is the plain old phone call. Brown telephones brokers directly to discuss a particular sublease space. As he notes, “everyone is so wrapped up in doing their own deals.” By calling, he can direct their attention to his opportunity.CAVEATS
Creative marketing strategies can only generate results when sublessors and building owners have realistic expectations. Tatham cautions the former: “Don’t be greedy! Take what you can; even if it’s a short-term deal – stop trying to recover every dollar you’re paying.” Brown has seen many would-be sublessors put their space on the market at only 10% or 15% below what they’re paying. “Then, as time creeps on, they get down to a year left on a lease and they panic. That’s when they cut the price to a fire sale. But very few people want a sublease for only a year.” It’s up to brokers to counsel their clients to ensure such situations don’t arise.
"Creative marketing strategies can only generate results when sublessors and building owners have realistic expectations."
Rosenblatt is a firm believer in straight talk. He advises prospective sublessors to “do a deep dive and really understand how bad the market is.” That might mean considering a buyout. In his opinion, buyouts are a better option than sublets for some tenants. Indeed, he’s arranged more than 100 buyouts since the pandemic hit.
Buyouts can benefit landlords too. As Tatham says, an early surrender gives landlords money in the bank and gives them control of the space again. He adds: “There may be sense in keeping the current people happy by letting them leave, rather than building up resentment and almost guaranteeing they’ll leave rather than downsize with you.”
Each tenant’s situation is different, of course, so sublets may be a better choice than a buyout in some instances. But even the most realistic sublessors who engage the most creative brokers have one more hurdle to clear—the landlord’s consent to a deal. That’s not always forthcoming. Clint Dewey, a director at Colliers in New York City, reports that many landlords have been dragging their feet on sublease deals recently. “I don’t really understand it because it’s a tenant’s market,” he comments.THE LATEST DEVELOPMENTS
Dewey’s frustration may not last long since the market appears to be turning. The report from Cushman & Wakefield points out that even though sublease space was added to the market in the first quarter of 2021, the rate of growth slowed significantly compared to previous quarters during the pandemic. Furthermore, the supply of sublease decreased in several key markets, including Washington, D.C., San Diego, Los Angeles, and Dallas.
Sublessees and their brokers should act quickly while the market still favors tenants. With supply decreasing but still high, sublessees can enjoy significant space upgrades. Rosenblatt recently negotiated a sublease deal that took a client from the eighth floor of a nondescript office building in Manhattan’s financial district to a sublease on the 72nd floor of One World Trade Center—at a lower rent than what the client was previously paying. His assessment of the sublease market today? “It’s a once-in-a-generation opportunity to steal something.”
Arlon Brown, SIOR
Charles Tatham, SIOR