Are Subleases Competing With Direct Leases?
LOS ANGELES—The sublease office supply is rising, and it could mean that direct lease landlords will have to compete with their tenants, GlobeSt.com reports in this UPDATE to a previous story.
LOS ANGELES—The increasing supply of sublease space may start competing with direct lease, according to research from NAI Capital. Earlier this week, the brokerage house gave GlobeSt.com exclusive access to a report showing that the increasing sublease supply may be an early indication of an oncoming downturn. In this update to that story, NAI Capital’s Forrest Blake and J.C. Casillas explain how the sublease supply may also affect the direct-lease market.
“It has been a bloodbath on the Westside. Imagine waking up today with an expiration on a lease that you signed five to seven years ago, and all of the sudden you have a 25% to 30% increase in rent,” Casillas, VP of research at NAI Capital, tells GlobeSt.com. “That is huge. Because of that, sublease space could offer the right tenant space, or at least another avenue.”
The report also shows a geographic pattern to the sublease trend, with 39% of the available sublease supply coming from the Westside market and 15% coming from the Downtown market, which already has a direct-lease vacancy rate of nearly 20%. This week, Sony and Verizon were among the companies that brought sublease space to the market, and Blake, a VP and tenant rep specialist at NAI Capital, said that this move is a perfect example of what is happening in the market.
For now, this is creating competition for direct lease space, but ultimately, tenants will begin downsizing their space as leases roll. “In Downtown there are already companies that are downsizing upon renewal,” Blake tells GlobeSt.com. “Even in industries that are growing, like healthcare, I don’t think you are going to see a huge transaction. That really tells you that we are feeling it on the ground. I think in a quarter or two, we are going to look back and see that this was the first sign of an issue.”
For tenant reps like Blake, the increasing supply means more opportunities and better deals for his clients. “We are going to use this as a tool to make better deals for our clients,” he says. “From a tenant rep perspective, this is an opportunity, because I am going to go in and negotiate a lot strong to get a better deal for my client. With less demand and more sublet space, there are more choices. That includes the direct space, because I am going to leverage off of that sublet space. We are seeing it as an opportunity.”
But, from the landlord perspective, this could mean falling rents and increased competition, in some cases with their own tenants.
For more information contact:
Forrest Blake
Vice President
NAI Capital
310-850-2381
fblake@naicapital.com
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