Justin Smith and Grant La Bounty discuss the challenges posed by an increase in sublease spaces competing with direct leases. They explore strategies for landlords to remain competitive, including offering attractive Tenant Improvement packages and rental abatements. The conversation touches on the impact of market rates, the percentage of sublease space, tenant considerations, and the possibility of transitioning from a sublease to a direct deal. The hosts advise landlords to be flexible in pricing or concessions given the current market conditions and extended leasing timeframes.
- Increase in sublease spaces due to economic downturn.
- Strategies for landlords include offering competitive TI packages and rental abatements.
- Discussion on the impact of market rates for tenants locked into leases.
- Estimate of the percentage of sublease space in the market.
- Different tenant types have varying needs (e.g., new headquarters, cost-effective warehouse space).
- Consideration of transitioning from a sublease to a direct deal.
- Flexibility in pricing or concessions is crucial for landlords in the current market.
- Changing trend of leasing timeframes, ranging from four to six months.
- Landlords willing to wait may achieve desired market rates despite longer leasing timeframes.
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Justin Smith: Welcome everybody to the Industrial Insights Podcast. Today it’s Grant La Bounty and Justin Smith, only. Chris is on the road. So, with a lot of our listings, we are dealing with sublease space that competes for our space, or rather sublease space in the same size as spaces that we have for lease and so, we thought it would be helpful to go over. What’s the difference and what’s the tension between spaces that are available direct and spaces that are available for sublease? So, Grant’s been on the forefront of this and was thinking through some of the things that landlords can do to position themselves or ways they can outcompete, subleases or some just to general insights. I thought we would go over that together and just break that down.
Grant La Bounty: Yeah, in today’s market we’re dealing with the fact that we’re not seeing the increases that we saw over the past two years. And with the downwind in our economy, we’re seeing an influx of sublease space and a lot of the sublease space that we see coming onto the market are deals that were signed in 2019, 2020 which were well under what market is today. So, it’s hard for some of our clients to try to compete against these groups that are 30-40 under what market is. So, we’re trying to think through what can they do to offer these groups to incentivize them to come into their listings at a market rate. I think the easiest one is you can offer them a pretty good TI package that a lot of these sub lessors aren’t able to do because they’re obviously cash constrained if they’re trying to sublease out a portion of the building or all of their building. And then another big thing is rental abatement. We can offer multiple months of free rent. Sub lessors don’t wanna be doing that because they want to get a subtenant in there as soon as possible paying their rent for them.
Justin Smith: Yeah, and then you brought up a good point of rental rates today. So, for anyone that’s signed a lease in the last two years, if they’ve decided now it’s time to shed space. They have already been lined up to the bar of paying a new market rent. And so, they cannot then discount their rate. And so that’s an interesting point. Will we see more of that?
Grant La Bounty: Yeah, so hopefully this problem of lower sublease rate won’t persist for not much longer because like you said, if someone signed a lease in 2021 or 2022, they’re at market rates and we haven’t seen a big uptick in rates over the past year. So, then they’re going to have to market at market rates.
Justin Smith: How much of the market do you think is sublease? If you’ve got a project and you’re thinking through it within a five- or 10-mile radius, do you think it’s 10%?
Grant La Bounty: Yeah, and that number’s gonna probably increase greatly as people are still dealing with the downturn in the economy and that they still need to figure out how they’re gonna weather the storm. that’s obviously the easiest way to get through it is getting a lot of your rent off the books.
Justin Smith: And if you’re a tenant and you’re looking, do you think the same tenant looks for Sublease Spaces for direct deals? When you think of the furniture group that’s looking for excess space or the print shop that’s trying to relocate.
Grant La Bounty: I think it’s really outta necessity. What do they need for a group trying to relocate? Having a new headquarters, they’re gonna want the nice new TI package to get their office space looking up to standard for their clients that come into the building. For a group that’s distribution in nature that only needs warehouse space, they’re gonna be looking for the cheapest option out there.
Justin Smith: And then one other thing is taking a sublease and doing a direct deal. Right, that’s something that’s possible out there. What are your thoughts on that? That is a way where you could get maybe some concessions from someone who has a space available for sublease and maybe still get a direct deal with the landlord. Are you seeing much of that out there?
Grant La Bounty: I think it’s a matter of necessity. Like I just said, if a group’s looking only for cheap space, they’re gonna go with a sublease. Because if they then go negotiate with the landlord for a direct deal for a five-year term, they’re gonna want, market rates. They’re gonna have to come up to it if they want to get a direct deal for the longer term with the TI package and rental abatement.
Justin Smith: So, if we sum this up, if you are a landlord and you’re seeing more space come available on the market, look at how much of those are subleases and then maybe not fret so much about them because they aren’t really truly comparable or truly competing in most instances. And as a result, either stay a little more firm on your pricing, or rather be grateful for getting a deal done and having given some concessions in order to get another space off the books before more space comes on if it does come on. That’s kind of two different tasks or two different ways you could think through what you learned from that.
Grant La Bounty: Yeah, and I think a big thing is, is if landlords are able and willing to allow their buildings to stay on the market vacant potentially for a couple more months, they most likely will be able to obtain their desired market rate. Because we have seen time of leasing go up greatly since the past two years, I remember we had many listings where we had five offers right When the tenant vacated, we had a group ready to go. Now we’re seeing timeframes closer to four to six months, which is very interesting.
Justin Smith: This old man knows six months being the normal timeframe. That’s what it was for the majority of the 20 years, I would say. So, it’s a trip to see that now. Now three to six months seems like a long time.
Grant La Bounty: Yeah, I got in at a very good time when it was all hot and people were ready to lease buildings.
Justin Smith: Yeah, the times are changing. Thank you for the insight, Grant. I hope that helps people and we’ll look forward to seeing you guys’ next week.