Corporations leasing larger office spaces are re-evaluating the use of their property, and they are allowing other companies to occupy 15-20% of their unused floor areas. Subleasing might be attractive to companies looking for a well-equipped office space in a good location, combined with cheaper rent – states VLK Cresa, the tenant-only advisory firm in their July study.
Besides the popularity of „home office”, the Corona virus pandemic forced company managers to re-evaluate the size of the office space they need on long-term. They are also considering what portion of their office space could be sublet – even temporarily – without making for employees more difficult to return to work or resulting an increase in costs.
The study highlights that many smaller companies have intended to take advantage of this situation, and they want to sublease smaller office spaces – typically 300-400 square metres. Furthermore, many of them have already leased office space in this way. These companies mainly try to sublease space from corporations who rent several thousand square metres, because such corporations want to utilize fast the suddenly „unnecessary” space, and consequently, reduce their expenses.
The main tenant considerations
“It is not typical for large corporations to give back office space to the landlord. The option to sublease is not massively popular yet, but it is definitely a fresh phenomenon. Ten years ago, during the last depression, this phenomenon did not exist, so there is no reference point to go back to. At the same time this is a rational decision from the tenant, because it helps the corporation to reduce their costs by leasing an unused space.” – says Valter Kalaus, managing director of VLK Cresa.
According to the advisor, it is worth subleasing a part of the office space for corporations who just signed a five-year lease contract. They are not advised to do so if it’s only a half or one year left on the lease contract. Besides it is less likely to find a suitable occupier for a relatively short period of time.
The managing director warns however that the main tenant needs to get the landlord’s consent. As the landlord might consider the potential occupier (subleasing company) undesirable in the building for non-compete reasons, if there is a similar direct occupier in the given office building. Obviously the main tenant has to take all necessary steps to ensure that the sub-tenant fully adheres to all regulations of the building and the leased office space, because he bears material and legal responsibilities.
The sub-tenants benefit
Companies looking for small office spaces (typically 100-150 m2) cannot really find options to lease in a modern, category „A” office building, in a good location, let alone on lower rent than the official rent. (There are some examples of such transactions, and there are currently similar offers on the market, but these are not very common.) These new office buildings are not designed for this purpose, as the smallest leasable office space is usually minimum 200-250 m2. To break up a smaller area from a larger office space is either physically impossible or is financially not reasonable for the landlord. Lucky is if they manage to find a whole floor (approximately 400-500 m2) from a main tenant who rents several floors in a small- or medium-sized office building – adds the author of the study.
“In spite of all the compromises, there are numerous advantages to be a sub-tenant compared to be a direct tenant in an office building. They can usually choose from properties where they could move in immediately, the office space needs only a few modifications, is already furnished, and has all the necessary cabling installed. And do not forget that the rent could be even 10-20% less as well. A further advantage might be the option to lease for a relatively shorter period, which can be 1-2 or 3 years, as opposed to the typically 5-year long lease contract; depending on the time remaining from the main lease contract. This nearly as flexible as the so called ’serviced office”– confirms Valter Kalaus.
In this context, the study states that serviced offices work for start-up companies or teams which have assembled for a certain project; these are not intended as long-term workplaces. Their advantage is the excellent location; work can be started almost immediately in a completely equipped office environment with reliable back-up support. It is a suitable option for example for start-up companies since they can lease additional space quickly if needed, or it is possible to lease a meeting room only for one occasion.
When is it worth to choose a serviced office?
“Approximately one year is the time limit from which it is worth looking to find a permanent office. Comparing the price of the serviced office with the classic office rents is not recommended, as the two are totally different models. The former may seem more expensive, since they provide full comfort (furniture, back office, IT devices, reception, usage-based fees, flexible time, etc.) but less commitments from the tenant. There is no separate service charge, one-time entry fee, purchase of furniture, IT installations, etc. On the other hand, they provide full flexibility, and actually, this is what needs to be paid”- added Valter Kalaus.
In case of the serviced offices, tenants can choose from: the classic cell office arrangement, which is more favourable now due to the stricter health measures. In this case tenants may control the use of these small offices by allowing to enter that space only to those who are engaged with the project. The other option where there is a co-working area where the community areas are similar to hotel lounges, with the criteria to have separate workstations.
“As the result of the pandemic, these co-working offices face difficulties temporally because there are not to many people who prefer to work in a place where one might get infected, working together in one space with strangers who might be potential virus carriers” – says the managing director of VLK Cresa.
Findings of this study are supported by the recently issued second quarter market data of the Budapest Real Estate Consultants Conciliation Forum (BRF). According to these, office market demand has significantly fallen in the second quarter, and the number of transactions also shows a remarkable decrease. Vacancy rate has increased to 7.3%, which represents an increase of 1 percentage point on a yearly basis.