This article was originally published by the Dallas Business Journal.
Local real estate professionals say an increase in sublease space could be around the corner, but what does that mean for tenants and landlords?
More than 5.9 million square feet of office space is currently available for sublease in North Texas, according to CBRE Research. This space can vary from a few hundred square feet to a few hundred thousand square feet. Some of the biggest subleases in the market today include 214,599 square feet available at downtown's Fountain Place, 196,000 square feet available at The Terraces at Solana in Westlake and 106,520 square feet available at The Campus at Legacy in Plano, according to LoopNet.
Tenants typically choose to sublease space for a number of reasons, including cost cutting, changes in space requirements and consolidations.
"We have two large subleases in our portfolio. One is from Tenet Healthcare when they decided to consolidate, leaving behind a few different office spaces," said Kathy Permenter, co-managing partner at Younger Partners.
Both cost cutting and space requirements will continue to influence subleases as shelter-in-place ends. While few local experts have seen an increase in subleases so far, some believe they're coming.
"First quarter was really strong before everything happened. What we’re finding through talking to landlords is that they feel like things haven’t really changed yet. No one is panicking just yet. With that said, we have clients asking for some of their space to be put on the market," said Scott Bumpas, managing principal at Cresa.
Impacts on tenants and landlords
For tenants, an increase in sublease space could translate into better rent rates and shorter lease terms, which is also attractive for a tenant testing out the market for the first time. For landlords, a growing number of subleases compete with direct space and could mean lower rent rates.
"We call it shadow space because it’s not direct space. When you have more sublease space out in the market, it tends to drive rates down a little," said Bumpas.
The creditworthiness of a tenant looking to sublease their space, known as the sublandlord, can also have a major impact.
"If it’s a creditworthy tenant, you may not get a renewal, but it’s less pressing. The tenant is on the hook. If it’s a less creditworthy tenant, it could become a very large issue. With a bankruptcy, it’s even more difficult for landlords and subtenants," said Grant Pruitt, president and managing director of Whitebox Real Estate.
If a tenant that is offering its space for sublease goes bankrupt, it not only puts pressure on the landlord, but can also leave the subtenant hung out to dry. Pruitt saw this first hand when working with a client that wanted to sublease space from a large oil and gas company. When the oil and gas company went bankrupt, the sublease was rejected and the subtenant eventually got kicked out of the space.
"They ended up bringing in security, locking the doors and basically kicking them out onto the curb. We eventually got them into another sublease, but they were pretty hesitant," Pruitt said. "It's a totally different risk profile. I'm not saying it’s a bad idea. I've represented tons of subleases. It's just important to know that there are risks on both sides."
Like other experts, Pruitt believes subleases will increase in the near future – as much as 52.4 percent over the next 60 days – according to preliminary projections he shared with the Dallas Business Journal.
While other experts agree that an increase is likely, few are sure of the magnitude. The theme of uncertainty also permeates as companies come back to the office. While many real estate professionals believe space requirements are going to change, few know what things will ultimately look like and if these changes will be permanent.