The Risks and Rewards of Subleasing Office Space in NYC During a Pandemic

The Risks and Rewards of Subleasing Office Space in NYC During a Pandemic

In a recent interview with Institutional Investor, Michael Colacino, president of NYC-based SquareFoot, said that after 9/11, sublease rates in the city doubled, going from 20% to 40-45%. A similar phenomenon took place after the financial crisis of 2008, as tenants renting commercial space in NYC were uncertain about the future. The upcoming months are expected to bring another wave of commercial subleases in New York City, this time fueled by the Covid-19 pandemic and its aftermath. 

The pandemic has already wreaked havoc on the city’s real estate market. Many companies, particularly those in the retail sector, have found themselves unable to keep up with rent payments. The result is a bleak landscape of vacant storefronts and empty office spaces that landlords are trying desperately to fill. 

Filling vacant office space post-pandemic

These landlords are adapting and resorting to space conversions, turning malls, stores, and even hotels into office spaces. But many companies have found that they don’t really need a physical office, at all. Businesses in fields like technology, media, and advertising, and even law and financial services have embraced the work-from-home trend to ensure their employees stay safe and distanced. Other companies are uncertain if and when their employees will return to the office, allowing their staff to work from home until the end of 2020, at least. 

As the evolution of this pandemic remains unpredictable, and the future remains uncertain in many regards, some companies are choosing to adopt telecommuting, at least temporarily. However, they don’t want to lose their offices, so they sublet. This is a trend that many companies are already following, even after reopening. 

This opens up opportunities for other companies to rent move-in-ready office space in NYC at better prices, for shorter terms, and without too many complications. Subletting office space has plenty of advantages, particularly during these uncertain times, but at the same time, it poses some significant risks. Let’s look at some advantages and disadvantages of subleasing office space. 

The pros of subleasing office space in NYC

Subleasing office space comes with various advantages for companies that don’t wish to commit to a long-term lease during times of economic uncertainty. The amount of sublet space in NYC is already on the rise, as more and more companies start to downsize or opt for telecommuting. 

Lower office rents

The main benefit that comes with subleasing office space is the lower monthly rent. Rates for subleased space are considerably lower than they would be in a direct lease agreement with the landlord. Companies looking for well-located loft space, retail space, or showroom space in NYC will be able to negotiate very favorable deals, as sublessors are eager to find tenants as soon as possible to fill up the unused space. 

Shorter lease terms

Lease terms for office space in NYC tend to hover anywhere from 5 to 10 years, which is quite a risky commitment during a pandemic. Subleasing offers companies the option of renting office space for a significantly shorter term, usually ranging from 1 to 2 years. For businesses or entrepreneurs who are unsure of the future, a shorter lease term is ideal, as it gives them room to weigh all their options. 

No build-outs necessary

Another crucial advantage of subleasing office space is the fact that these spaces are usually move-in-ready or close to it. The sublessor has been using the spaces, which means that they typically come fully furnished, with electrical and lighting systems in place. This is a significant advantage for companies or individuals looking for a space that they can move into as soon as possible. 

Less paperwork

When looking to lease or sublease a commercial space in NYC, you will want to work with an attorney who can handle all the paperwork and make sure there are no legal issues with the documents. Lease agreements in NYC can consist of dozens of pages; however, subleasing involves significantly less paperwork. A sublease agreement usually only takes a couple of pages, which your attorney can go through in a timely matter. 

The cons of subleasing office space in NYC

Though subleasing is a safe option for companies looking for built-out office space, lower rents, and shorter lease terms, it also poses some risks. These risks should be carefully weighed against the benefits, and steps can be taken to avoid them altogether.

The lease term is set in stone

When subleasing office space, the lease term is non-negotiable. The duration of the lease will be equivalent to the remaining lease term that the sublessor has negotiated directly with the landlord. So, if a sublessor has two years left on their lease, and you need an office space for two and a half years, you won’t be able to extend the term and might need to find another property.

You’re bound to the terms and conditions of the master lease

The terms and conditions of your sublease are also non-negotiable, as they will be the terms that the landlord and the sublessor have decided on in the master lease. By subleasing office space, you’ll have no choice but to accept the terms and conditions negotiated by your sublessor – which leads us to our next con.

Additional research

In order to avoid any issues that might arise in the future, it’s essential to be aware of any clauses or conditions agreed upon in the master lease. Your attorney will need to go through the master lease, as well as the sublease, to make sure that you won’t run into any issues along the way. Master leases can consist of 60-70 pages in NYC, so that will be a time-consuming aspect that can delay the entire process.

You could lose your security deposit

Subleasing during a pandemic can be risky if the sublessor is in financial trouble. If the master tenant defaults and has to be evicted from the space, you, as a sublessee, can lose your security deposit. What’s more, you can lose the space and have to find another location. A way to avoid this situation is to have your attorney place your security deposit in escrow, so you don’t lose it in case of a default. 

You could lose the space

In case of a default by the master tenant, the sublessee runs the risk of losing the space. You can try to avoid this scenario by having your attorney ask the sublessor for their financial statements. This will give you an idea of the risk of default that exists. Another thing you can do is ask the landlord to notify you if the sublessor falls back on payments or is at risk of being evicted. You’ll then be able to take steps to make sure you don’t lose your office space.  

Conclusion – An imminent surge in subleases

During these uncertain times, no company wants to burden itself with complicated decade-long leases. Most office-using businesses have already embraced telecommuting, and they’re not sure if they will even go back to a physical office. Even lawyers and financial advisors have found that working from home is a viable option, holding meetings over Zoom and renting offices by the hour to meet with clients.

Given the circumstances, the subleasing wave seems inevitable. The good news is that landlords are much more flexible in their eagerness to fill vacant office spaces, so there is a lot more room for negotiations that benefit tenants. Moreover, master tenants won’t want to lose their custom-built office spaces, should they decide to return, so they will be open to subleasing. While some companies are going fully remote, others plan to return to the office in one way or another, and subletting is a safe way of doing just that.