New York landlords are formulating plans to help their properties compete with a wave of new sublease offerings. Some are trying to sweeten the pot by offering built-out space that is ready for move-in, McCarthy says. “Tenants don't want to spend money on build-outs.”

Indirect pressure

A tenant is on the hook to pay rent through the end of a lease term regardless of whether the leased space is occupied, so landlords needn't fear losing rent when their tenant wants to bring in a subtenant. The real challenge to property owners is to maintain rental rates in a market where subleases offer tenants comparable space at below-market rates.

Tenants seeking subtenants will accept below-market rent because they simply want income to help pay their own rent on the master lease. Landlords, on the other hand, demand market rates in order to make a profit, explains Robert Sammons, director of research in the New York office of Colliers International.

Some landlords will have a hard time competing, particularly in markets like Manhattan where downsized financial services firms are hawking Class-A offices for sublease with excellent locations. “A lot of this space has a good bit of time left [on the master lease], and it's trophy space,” Sammons says.

A sublease tenant can expect to pay 25% to 40% less rent than the prevailing market rate, according to tenant representation specialist Marc Miller, an executive vice president at Winoker Realty Co. in New York. “That's about one-third off, and many of these spaces come furnished, some with phone systems,” he says.

Landlords can help maintain their property values by not allowing occupancy levels or rental rates to slip. But that job will grow tougher as subleasing gives tenants more bargaining power, says Pontious. “For about the next 24 months, a landlord today has got to be high on customer service and really prudent with operations,” he says.

Miller agrees. “If there's an electrical dispute or a tax dispute on a certain invoice, the landlord may want to swallow it,” Miller says. “The tide is turning slowly but surely to a tenant's market.”

A HARBINGER OF THINGS TO COME?

As the economy shows increasing signs of weakness and tenants downsize their space needs, office sublease space in several markets is on the rise as this sampling of key markets shows.

Source: Gribb & Ellis