What does the recent tsunami of energy companies downsizing have to do with tenants in need of office space in Houston?
Houston’s office market has not been this dysfunctional since the mid-1980s. Nominally 23 percent vacant, I believe the market is actually closer to 30 percent vacant. Companies with leases expiring on the horizon can almost always improve their bottom line by considering moving. For many still under contract in an expensive lease agreement, but with surplus space, the sublease disposition process is often a viable option.
Every tenant’s situation is unique. Relocation or lease negotiation depends on business size, image consciousness, proximity to clients and employees, budget parameters, available credit, build-out needs, lease terms and market timing.
Subleased space is typically much less expensive than space leased directly from landlords; sublease terms are generally shorter with less emphasis on subtenant’s credit.
If you have space for sublease, here are six steps to follow in order to protect your time, efforts and investment.
1. Avoid blind alleys
Make sure that you have a right to sublease or assign and make sure the landlord will approve a sublease.
The landlord must approve any sublease and may even provide you with a document. Don’t present a potential sublease document before you have vetted it with your landlord. You can’t make a deal if the landlord won’t agree, and most agreements take 30 days for approval. Time is money — use it wisely.
Market the space to your fellow tenants and brokers. Make sure your broker utilizes mass broker emails, lists the space in the CoStar database, Loopnet.com, goes door-to-door marketing your space, and uses any other available opportunity to sell your space, perhaps even banner signage.
Visit tenants in the building and let them know there’s space available in their immediate vicinity.
Remember, in office leasing, as in land, the most likely buyer of what you have to sell is your neighbor.
3. Aggressively pursue prospects
People who are in the marketplace for space want to see your particular opportunity.
How do you know they’re in the market? You don’t — but brokers do. Even if they aren’t clients of ours, a good broker will know who is in the market for space.
Be aware that landlords generally don’t want government offices, call centers, medical users, or schools of any sort. Landlords typically have the right to be subjective on what kind of business they approve on a sublet, but are usually reasonable given the potential sub-lessee’s financial wherewithal. Review your current lease and identify if certain businesses are precluded; then advertise and market to the rest.
4. Focus on prospective transaction types
Do you know and understand the difference between a termination, buyout, sublease, and assignment? In a sublease, you are still responsible for making the rent payment in full. If you get the landlord to agree to an assignment, the assignee has stepped into your role as the new tenant. You’re typically done.
In any number of markets, tenants could get more cash for their space than they are paying by subletting. In Houston, the chance of this happening is slim to none. There’s just too much available space.
A landlord has the right to terminate a lease if it’s put it up for sublet. This is called recapture. He or she also usually has the right to get some, sometimes all, of any overage on a sublease minus any expenses the tenant incurred for marketing, commissions, tenant improvement and/or legal fees.
Understand the different transaction types and calculate your prospective costs before finalizing any deals. Tenants must determine costs of rent, commissions, overages, loss, and tax implications in a sublet/space disposal situation.
5. Submit for approval
What can be done to speed up the process? Stay ahead of the curve. Submit the previously promulgated sublease to the landlord for their approval.
6. Complete the transaction
By pre-handling objections and putting a process in place which facilitates immediate decision making, we minimize blind alleys and focus on probable transactions. The result is disposing of the space in the least amount of time and at the lowest cost.
Remember, the first lease loss is often the least loss. If you want to cover any part of these sunk costs, you must price your sublease space to move.
This article originally appeared in the Houston Business Journal, April 26, 2018