More Tenants Subleasing Office Space

More tenants and bigger tenants are choosing to sublease office space in this recession rather than rent directly from landlords, according to a recent real estate brokerage report.

Los Angeles tenants in the last six months have signed subleases ranging from 16,000 square feet to the L.A. Unified School District’s 704,000-square-foot sublease at 333 S. Beaudry Ave., said Seth Dudley, executive vice president at brokerage Julien J. Studley Inc.

Although sublease space often rents for much less than offices leased directly from landlords, Dudley said, large organizations usually avoid subleases because of the drawbacks.

Subleasing requires agreeing to someone else’s lease terms. The subtenant seldom gets an option to renew the lease when it expires and the sublease usually is voided if the original tenant goes out of business or otherwise defaults on rent.

But some large tenants are turning to subleases today, Dudley said, because subleases sometimes are the only way to rent large blocks of space.

In addition, sublease space represents a much higher percentage of overall vacant space--20% overall in Los Angeles and up to 25% in West Los Angeles. The typical portion is 10% to 15%.

Abundant sublease space tends to drag down rental rates because it pressures landlords to lower their rates, although some hold the line, expecting the market to improve.

Concerned about sublease space nationally, international rating agency Fitch announced last week that its commercial mortgage-backed securities (CMBS) group “has placed an added focus on the impact of sublet space” when underwriting CMBS loans.

Commercial mortgage-backed securities are bonds that depend for their interest payments on rents from commercial properties.

Despite the potential disadvantages of sublease space, landlords often allow subtenants to stay if the original tenant defaults, Dudley said.

But that usually means renegotiating the lease, generally at a higher rent.