New York’s commercial market is being crushed under the weight of 20 million square feet of available office subleases. Until that space is absorbed by new tenants, the market can’t move forward, according to Ruth Colp-Haber of Wharton Property Advisors, who specializes in these deals.
“It’s a predictor of the market,” she said, noting that sublease rents are generally 25% lower than the cost of leasing directly from the building owner. “They will undercut the direct leases and it’s very difficult for the owners. Many can’t and won’t compete with the subleases.”
And as expected, tenants are wasting no time to capitalize on their leverage.
“We are seeing well-located, nicely built-out subleases move quickly, especially in Soho,” said Adam Henick of Current Real Estate Advisors.
Subleases can be offered by both large and small companies that are either moving elsewhere sooner than they thought or simply needing to shrink their footprint. Those in advertising bulk up their headcounts when they win a major client, but also shrink their footage when they lose them.
The pandemic has also affected occupancy as some companies found they were able to maintain their businesses while working from home and now don’t need all their original square feet.
“If you have 5,000 square feet for three years you can lease it, but if you have 50,000 square feet for a couple of years, that is a problem.”
As business needs change, companies may also pick up options on contiguous floors to ensure they control the space for their future growth, but then sublease out those spaces while waiting to catch up.
“If you have 5,000 square feet for three years you can lease it, but if you have 50,000 square feet for a couple of years, that is a problem,” said Peter Turchin of CBRE.
One of the most challenged parts of the city is Hudson Yards, where a whopping 2 million square feet of subleases are available. Companies like Warner Bros., Facebook, Equinox, Guardian Life and Pfizer at the Spiral at 66 Hudson Blvd. all have subleases on the market for both raw and furnished offices.
“They are all high-quality spaces with high-quality sub-landlords providing a full-work letter and a full free-rent package and a discounted rent,” said Gabe Marans of Savills about those spots.
But even in this challenged market, quality doesn’t always come cheap. In October, Dan Loeb’s Third Point, put 89,000 square feet on the top three floors of 55 Hudson Yards up for sublease through July 2029 at an asking rent of $165 per foot.
“We know of several tenants looking closely at the subleases at Hudson Yards,” said Jeffrey Peck of Savills. “Cash is king and having good credit is everything. If you have a creditworthy tenant, the landlord is rolling out the red carpet.”
Meanwhile, Google is also offering pricey sublease space in Hudson Square since its new home opened at 550 Washington St.
But other subleases are cheaper. In a recent deal near Madison Square Park, Instacart has subleased 21,000 square feet at 50 W. 23rd St. from an event platform, Bizzabo, which will remain in 10,000 square feet. There are only a few years left on the lease, but it gives both companies time to figure out their path forward. Market rents in Chelsea are now in the $80s per foot.
Another bargain is from Paperless Post at 115 Broadway — aka 2 Trinity Centre — where 20,907 square feet is available for sublease for $35 per foot, according to Colp-Haber.
Material Plus at 432 Park Ave. South is offering 9,800 square feet at an even cheaper rent in the mid-$30s per foot.
As good as subleases can be for certain companies, there are downsides, and many tenants will avoid subleases that have just a few years remaining.
Nevertheless, Michael Cohen of Williams Equities observed that even subleases with terms less than three years can provide opportunities for tenants as they become “fair game for a three-way deal.”
In this manner, Cohen said, the building owner avoids a vacancy, and the original tenant is off the hook while the subtenant enjoys a new direct lease that is in part subsidized by the existing tenant.
This past summer, a 400,000-square-foot sublease from Publicis Groupe at 1675 Broadway — an 800,000-square-foot Rudin building — was taken off the market for a few months, as the advertising giant was weighing its options.
“It’s the nicest, lowest-cost sublease option in Manhattan with a great landlord and sub-landlord,” said CBRE’s John Maher, who leads the rental team.
Several other tenants in the building are attorneys, including the law firm Davis+Gilbert, which added a floor in November to expand to 98,124 square feet. A big sublease from Publicis covers 132,000 square feet in the tower with a spectacular three-story atrium; around 90,000 square feet in the mid-rise and 188,000 square feet in the base. The term ends in May of 2031.
“Everybody has to compete with very nice spaces for sublease,” said Marans of the landlord’s plight.
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