Advice and Opinion

Subletting – a possible remedy for vacant office space

Galetti Corporate Real Estate Associate, Director, Justin Thom.
Galetti Corporate Real Estate Associate, Director, Justin Thom.

The economic climate is giving way to innovative ways of managing office space. While flexible lease agreements and the restructuring of rentals are apparent, little thought has been given to the option of subletting.

Galetti Corporate Real Estate Associate Director, Justin Thom says various legalities must be considered but if done in conjunction with the landlord, there is nothing to stop tenants from heading down this path.

Offices are currently sitting at around 50% capacity with many working from home; this is set to continue for the foreseeable future as we continue to practice social distancing. Furthermore, many companies have had to downsize”.  

Landlords (and tenants) can look to subletting to help fill vacant space. Thom says that ‘To Let’ boards are being seen now, more than ever. The pressure on both landlords and tenants is immense and finding alternate avenues to manage space is crucial.

There have been a few instances where e-commerce and FMCG occupiers are taking up sub-lease options when the current tenant has no need for the space. “Generally, the occupier can get the space for less than taking up new space and are not bound by the long-term obligations thus giving them the opportunity to correctly plan for the coming months/years ahead”.

Based on Galetti’s in-house research, Thom predicts that the commercial real estate sector will take three to five years of take-up to return to levels last seen in early 2019.

On the international front

South Africa is taking note of international trends and is set to follow in the footsteps of commercial hubs around the globe.

In Boston (USA), subleased office space has hit a ten-year high. “In the past, finding office space in Boston was a struggle. Today, however, companies like TripAdvisor have had to scale back their footprint significantly and it is anticipated that subletting will continue to ramp up over the next few quarters”.

San Francisco’s inventory reached a new high with 41% of the city’s office space standing empty. Thom says that the research continues across the continent and it is expected to be similar on local shores.

Canada, the world’s tenth largest GDP, has also felt the pinch. Vancouver’s prime commercial real estate hub has recorded their lowest occupancy rates and they are getting closer to doubling their lowest ten-year average.

If the building is not yours, it’s vital that you disclose your intent to sublet to your landlord. There is a general clause that stipulates that you cannot profit from subletting but in the current climate this will most likely not be the case,” says Thom. 

The following should be considered: 

  1. Lease expiry date: “Unless the landlord agrees to a longer-term, your lease expiry must coincide with the sub-tenant’s lease period”.
  2. Damages: “Ensure that you are adequately covered for damages as the sub-tenant is bound by the terms of your lease”. 
  3. Use of property: “If you’re using the property as a warehouse for instance, make sure that the sub-tenant uses the premises in the same way”. 
  4. Re-stacking or relocating: “Should you wish to opt-out of your lease, be sure to consult a professional who can take you through the cost benefits”. 
  5. Breach of contract: “Should a relationship turn sour both the landlord and the tenant would need to place the sub-tenant in breach and sue for performance and/ or damages”. 
  6. Values and synergy – “Sub-letting is more than just the division of office space to reduce costs, it’s about the merging of teams and cultures too. When selecting a sub-tenant, consider their values, philosophies, culture and line of work”. 

Thom urges those who are considering sub-letting to take the feelings of their own team into account. 

Creating a new working environment through this arrangement should be a joint decision so that the change in structure is communicated positively to all parties. We’ve been forced to be as agile and adaptive as possible in these uncertain circumstances – but change doesn’t have to be a negative” he concludes.