Welcome to Hot Sublease Summer
You’ve heard of ‘hot boy’ and ‘hot girl summer,’ but have you heard of hot sublease summer? Well, the New York City commercial real estate market is hot for the sublease (and that’s good for you).
You’ve heard it ad nauseam: New York is back (we still aren’t sure it ever left, but we will go with the uplifting message). The MTA is running 24/7, fans are piling into sports venues, mayoral candidates are debating in person, and more and more people are piling into Grand Central Station every morning. Just yesterday we smiled when someone complained to us about traffic. People are heading back to the office; life is returning. Traffic is a great sign.
One question we’re continuously asked: with New York City ‘back,’ can I still leverage the down market to my advantage? The commercial real estate market is still down from pre-pandemic levels, but we’re seeing signs that we may have reached the bottom, and the market will only rise. With that said, there are still many opportunities to leverage the market and the best way we’re seeing is through subleases. There are currently over 20 million square feet of available sublease space in New York City, a record high. Hence… ‘hot sublease summer.’
So, what is a sublease? A sublease is the re-renting of space/property by an existing tenant to a new tenant for all of or a fraction of the tenant’s existing lease contract. The original tenant is still liable for the obligations stated in the original lease agreement, including the full payment of rent each month.
How does a sublease work? When you take a sublease, you’re not taking over the existing lease; you’re negotiating and signing a new lease between your company and the sublessor (the company subleasing the space). Every month that a sublease remains vacant, the company trying to sublease the space is losing money and, therefore, more likely to make a deal. When subleasing, everything is on the table for negotiation: rent and rent escalations, free rent, money to improve the space, taxes, and electric.
What can I expect in a sublease? Sublease spaces often have brand new builds, new furniture, and beautiful, modern design with features that incorporate many of our learnings and new norms over the pandemic. We recently wrote 6 Office Space Trends for 2022 (and Beyond) that highlight many of the features you can find in discounted sublease spaces in the NYC sublease market.
Subleases are going faster (hot sublease summer!) than anything else on the market – why? Steep discounts (especially in this market) + ready to go spaces (fully furnished and wired) + a high chance you can find the exact design and layout you need. Each specific sublease scenario is different, but because it’s space being leased by a company with unused or unwanted space chances are you’ll have an increased amount of leverage to negotiate the economic terms vs. a direct space. For terms like HVAC, cleaning, signage, assignment, and subletting, among other more qualitative terms, you’ll be subject to the master lease between the building and the company subleasing their space. Your broker will always ask for a copy of this lease for review.
What is the advantage of a sublease over a direct lease? Subleases can offer substantial discounts to direct leases for a few reasons: they’re typically priced at lower asking (and taking) rents because you as the tenant are paying another company instead of going directly to the landlord, and that company is looking to get rid of unused or unwanted space. Chances are they’ve budgeted for ‘taking a hit’ on the space already. During the pandemic, we saw up to 50% discounts on sublease spaces; now, for many sublease spaces you can still expect higher than average discounts (think 25% – 40%). For a select few, we’re seeing so much interest that the space moves for close to ask and moves quickly. Your broker can usually ask the right questions to gauge the level of interest and give you a sense of the estimated discount from the beginning.
You also save on furniture and wiring — subleases are always fully furnished and wired and ready to go (or what we call “plug and play” because you can, you guessed it, plug in and get to work). Many subleases reflect substantial investment in design, build, and furniture by the company subleasing the space, and depending on the space you can literally save millions these components relative to a direct deal. In this market, there’s a strong chance you can find the design, furniture, layout and general “vibe” you’re looking for in a space (even higher if you have a broker who knows the sublease market and actually listens to what you want…like I don’t know…us).
The bottom line is subleases allow you to take high-quality space with less time commitment and greater flexibility than a direct lease typically requires. Suppose you plan to return to the office and don’t feel ready to commit to space for a long-term lease; in that case, subleases are the way to get your company back to a welcoming, creative, collaborative space without the pressure to call that space your permanent home. And if you want to extend your lease, you can find out before subleasing the space if a direct extension is possible and at what approximate price (the price will be higher for the extension).
What is the current state of the NYC sublease market? More and more companies are making headlines with a return-to-work plan. Bloomberg reports that 18% of office workers returned to work as of the end of May, with over 60% expected to return in September. Right now, there are over 20 million square feet of available sublease space (a record high for New York City), and that won’t change anytime soon. Still, we’re seeing the ‘hottest’ subleases going faster than anything else on the market.
The New York commercial real estate market is your oyster; long live #HotSubleaseSummer.