In light of COVID-19, several factors could drive organizations to rethink their space strategies, including a significant percentage of employees working from home, a shift in their business focus or strategy and challenges in paying rent.
Subleasing is a viable option for companies looking to right-size their workspaces.
Whether a business opts for a lease assignment (a transfer of all its lease interest to an assignee for the remainder of the term) or a sublease (a transfer of all or part of its lease interest to a subtenant for all or part of the remaining term), either move presents advantages.
Both alternatives typically require landlord approval.
This article focuses on subleasing and its benefits to the sublandlord, subtenant and landlord.
Adjust your workspace to your workforce without relocating.
With the “largest work-at-home experiment ever” proving to be successful, a good portion of the workforce could continue to telework post-pandemic.
According to the Statistics Canada article Running the economy remotely: Potential for working from home during and after COVID-19 by Zechuan Deng, René Morissette and Derek Messacar released on May 28, approximately four-in-10 Canadians hold jobs that can likely be performed at home.
Globally, four-out-of-five employees would like to work remotely at least one day per week after the crisis is over, according to the Global Workplace Study Colliers’ Workplace Advisory team conducted, based on 3,000 responses from more than 25 countries and released April 15.
Should you decide to downsize your workspace due to a reduced number of employees working at the office, but do not wish to relocate, subleasing is an option.
Subleasing allows you to offload the space you don’t need and stay at the same address, while also offsetting total rent costs.
Retain control of your space and relationship with your landlord.
In a sublease arrangement, you establish a new landlord-tenant relationship with your subtenant and control all interactions pertaining to the sublease between you and your subtenant.
You also maintain your relationship with the head landlord.
Depending on your sublease terms and any requirements the head landlord may have for a direct agreement with the subtenant, the subtenant may not have any direct interaction with your head landlord.
Retain space flexibility.
If you need less square footage but want to preserve a level of space flexibility, you can, for example, arrange a sublease for half your space for a short term (i.e., shorter than your head lease or any extension periods) and install a demising wall separating your space from that of the subtenant.
At the end of the sublease term, should you need more space, you can reclaim the sublet portion of your workspace for the balance of your head lease term.
Paying rent has been a challenge for businesses during the pandemic.
According to the report Rent Relief Requests: Key Drivers and Owner Recommendations, authored by Colliers Canada’s Real Estate Management Services (REMS) team and released April 27, 21 per cent of the team’s 7,100 commercial tenants across Canada requested rent relief in April.
The team’s follow-up report Rent Collection and Relief Status, released May 31, states 16 per cent of its Canadian commercial tenants paid no rent in May.
Affected businesses’ inability to pay rent is expected to remain an issue following the reopening of provincial economies, according to the same follow-up report. It projects a month-and-a-half delay after an average reopening date before rent collections pick up again.
Finding a subtenant for all or a portion of your space can greatly mitigate your costs.
Move into a fully built-out space at a fraction of the cost.
A sublease agreement often allows you to readily occupy a pre-finished, move-in-ready premises, saving you customization or repair costs.
A space maintained in good condition makes the process more seamless and cost-effective.
Pay limited transaction costs.
Subleases are typically conducted on an as-is basis without landlord’s work or inducements, lowering sublease rental rates.
Additionally, the sublease may be for furnished premises or provide an option for the subtenant to purchase existing, tailored workspace furniture, lowering transaction costs.
Enter into a short-term agreement.
A sublease opens possibilities for a shorter term than would otherwise be secured on a new lease. A shorter-term agreement doesn’t “lock you in” and allows flexibility for your space or growth strategy.
Possibly pay lower rent.
Depending on the situation, the tenant may be seeking to mitigate risk and financial exposure, and may be inclined to accept a lower rent than the face rate on the original lease, and remain responsible for paying the difference to the landlord.
In this case, you benefit from the tenant’s motivation to secure a subtenant by getting a break in the rent.
Get an alternative to co-working space.
Sublease space is increasingly coming to the market.
The Colliers Research team’s most recent Multi-City Sublease Report indicates: “In Canada’s three largest employment centres – Toronto, Vancouver and Montreal – 863,000 square feet of new sublease space came online between March and May 2020, of which 482,000 square feet are considered immediate.”
Conversely, Colliers’ Research and Data team has found that activity within co-working locations is significantly reduced.
If you are a business owner requiring a smaller space and would rather not commit to a long-term lease, you now have more options to secure the workspace you need at terms that work for you.
Maintain your cash flow.
In this time of market adjustment, subleasing allows you to maintain cash flow by retaining the original face rates on your head lease.
If your original tenant is experiencing financial difficulty and unable to make rent payments, consenting to a sublease agreement assures you of monthly rent payments from the subtenant.
Alternatively, even if your tenant charges the subtenant less than the original rent rate, your tenant is obligated to make up the difference and provide you the full rent payment, sheltering you from any rental deficit.
Prevent exposure to vacancy costs.
As a result of the COVID-19 crisis, many businesses are vulnerable to financial difficulty, and unfortunately, rent is one of the first and major obligations they find themselves unable to fulfill.
By permitting existing tenants to enter into sublease arrangements, you protect yourself from vacancy costs and other transaction costs related to backfilling and releasing empty space. You keep your space occupied, your costs controlled and your finances secure.
As pandemic restrictions continue to ease and people begin returning to the office, companies may find that their space requirements have changed.
Whether it is a permanent work-from-home arrangement, major pivot in business strategy or financial issue driving your decision to right-size your space, subleasing is an option to consider.
It is important to partner with a trusted advisor, since there are advantages, risks and a process.
On a recent Colliers webinar that I moderated, Subleasing Needs During COVID-19, I asked attendees what percentage of their clients they think would consider subleasing: The response was equally divided between 1 to 10 per cent and 11 to 25 per cent. The Colliers team and I are here to help ensure you make the right decision to best achieve your desired results.