While office vacancy rates are rising all over San Diego County, 2009 offers an opportunity for companies to secure space in two prestigious office markets in coastal North County.
The Del Mar Heights/Carmel Valley submarket and the Carlsbad submarket have a combined vacancy rate of 26 percent. Sublease vacancies for these markets are currently at 4 percent, or 450,000 square feet, but experts throughout the real estate market expect that number to increase steadily, providing a great opportunity for companies to occupy prestigious office space at a reduced cost.
More layoffs are expected, inevitably creating more sublease space. Additional space will become available as other companies proactively choose to consolidate their office space to reduce occupancy costs and overhead.
Companies willing to consider a sublease could benefit significantly. Typically, subleased space comes at a cost of 10 percent to 20 percent lower than a direct lease with a landlord. Sublease tenants may also find they can negotiate more flexible lease terms.
Often, sublease space comes already furnished and cabled, and the sublease tenant may pay very little for these conveniences simply because it would cost the existing tenant money to have them removed. Furniture and cabling is valued at roughly $8 to $15 per square foot, depending on a number of different variables. Having this infrastructure already in place saves money and makes for a speedier transition process for the sublease tenant.
Subleasing does, however, present some challenges, and the sub-lessee needs to manage the risks.
Generally, the original tenant will have no budget to offer the subtenant for improvements. Thus, if the company subleasing the space wants to customize the space, they will have to do so on their own dime. Usually rental abatement will be granted by the original tenant in lieu of a tenant improvement allowance.
The subtenant will be subject to the provisions of the original lease agreed to by the landlord and the original tenant, so subtenants have a responsibility to understand what the original tenant's lease requires and allows.
Before subleasing space, the subtenant should also encourage the original tenant to verify that their lease does not include a recapture clause, which would allow the landlord to reclaim all or part of the premises if the original tenant requests to sublease part of their space.
Another risk for a subtenant might be the cost of removing any improvements installed in the subleased space by the original tenant, or worse, restoring the space to its original condition.
Subtenants should also be aware that renewal and expansion rights are customarily personal to the original tenant through their master lease with the landlord. Thus, subtenants cannot be assured of renewal or expansion opportunities. Similarly, signage and parking rights are negotiated by the original tenant directly with the landlord. The subtenant should incorporate these business points into negotiations and try for landlord approval prior to executing a sublease.
If the original tenant defaults on their lease obligations, the subtenant may not necessarily be protected from eviction along with the tenant. Depending on market conditions, though, the landlord may be amenable to signing a new lease directly with the subtenant.
Subtenants should also make an effort to ascertain the financial condition of both the landlord and the original tenant before signing a sublease agreement. As an additional protective measure, subtenants may want to consider securing a recognition agreement with the landlord. If the subtenant has a solid operating history and can show strong financial status, the landlord may agree to recognize the subtenant and its rights under the sublease should the original tenant default on its lease obligations.
Negotiating to make payments directly to the landlord can also provide protection to the subtenant, assuring that the landlord has proof of the subtenant making its lease payments on time.
Considering the increased risk of landlord default in these trying economic times, the subtenant may also want to inquire about what protections the original lease provides. Tenants may or may not be protected from eviction if a bank or new investor takes over the office building.
Many companies choose to work with a qualified tenant representation broker to secure sublease space to help navigate the often complex business risks and details involved in a sublease or assignment of lease.
Lorentzen, executive vice president of Jones Lang LaSalle's San Diego office, specializes in representing tenants in San Diego's North County.