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Front Page » Top Stories » Office Landlords Battle Aggressively To Undercut Sublessors

Office Landlords Battle Aggressively To Undercut Sublessors

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Written by on March 11, 2010

By Marilyn Bowden
Although office tenants are still looking for ways to decrease their space needs, good deals from landlords are keeping the inventory of sublease opportunities from skyrocketing, brokers say.

"Economic down times work against subleases," said Brett Harris, president and COO of Adler Group, which leases or manages about 4 million square feet of commercial property throughout the Southeast.

That’s because landlords have large amounts of direct space for lease, he said, and are willing to compete aggressively with sublessors to fill it.

"What ends up happening, given the market and significant availability of space," Mr. Harris said, "is that in some cases tenants move directly into direct space rather than going with the sublet.

"With a sublet, the term is less, and most likely there is no money for tenant improvements and no free rent.

"The best scenario is if you can get the landlord to work with you in making that sublease a longer lease and expanding the confines of the sublease, but it’s not in the landlord’s best interest to do so."

Competition from sublessors doesn’t necessarily put a landlord at a disadvantage, Mr. Harris said.

A sublease opportunity brings more traffic to the building, he said — prospects that might be converted to direct-space tenants.

"Tenants are coming to us for three- to five-year deals," he said, "and asking for the bare minimum in tenant improvements — at most carpeting and paint.

"If there are no tenant improvement dollars to amortize over the length of the lease, the landlord can be more competitive."

Rashid Siahpoosh, a vice president with Transwestern South Florida, said he sees three trends emerging in the sublease market.

The first is the tendency noted by Mr. Harris for landlords to try to transfer a potential sublease to a direct deal.

"They are being very aggressive," Mr. Siahpoosh said.

Second, many tenants are taking advantage of sublease opportunities to move from tertiary markets such as Biscayne Boulevard or Coral Way to main markets.

"I’ve seen many subleases filled by tenants nontypical for that specific asset," he said. "Because financially they still have the original tenant on the hook, landlords are willing to agree to the sublease to help take the burden off the main tenant."

Finally, Mr. Siahpoosh said, some institutional landlords are invoking a seldom-cited clause within some leases that stipulates that if a prospect looks at direct space in a building, tenants don’t have a right to compete with the landlord for that tenant.

Every subleasing situation is different, said John Marshall, a senior director at Cushman & Wakefield, but in general they attract more entrepreneurial tenants.

"A typical sublease tenant might be a group of lawyers who split off from a larger firm," he said, "and want to get into space in a few weeks rather than a few months."

But there are so many opportunities for tenants these days, he said, that subleasing is not as attractive as it might seem in other times. Corporate America, he said, has always shied away from subleases.

"If I were a tenant," Mr. Marshall said, "I would be locking in my lease with the landlord for as long as possible today."

Darren Campbell, an associate with Campbell Real Estate Advisory Group, said Miami’s sublease inventory is finally in a positive absorption trend.

"However, the ripple effect of today’s sublease rates will continue to adversely affect direct lease rates into the foreseeable future," he said, "pressuring landlords to dig deeper.

"Class B buildings in Coral Gables that, not more then 18 months ago, threw out proposals in the mid-$40s with a "take it or leave it’ attitude are now scraping up deals in the mid-$20s."

But deeply discounted sublease space — deals with significant remaining term, recent build-outs and furniture in place — can still provide the right tenant with a drop-fit opportunity that direct space can’t compete with, Mr. Campbell said. "For the tenant that finds its glass slipper, the downsides common to subleasing become less significant."

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