Is subleasing a good idea? The answer, like most others in commercial real estate, is “it depends.” This question is not from the point of view of the existing tenant who is seeking to transfer their lease rights/interests and possession of the premises to a 3^rd party, known as the sublandlord/sublessor or assignor. Rather, it comes from the perspective of the 3^rd party, known as a subtenant/sublessee or assignee. For tenants, sublease/assignment rights are one of the most important afforded to them in a commercial lease because they provide a means of “getting out of their lease” when it makes economic, strategic, or practical sense to do so. Tenants are not usually, truly released from their leasehold obligations but rather are able to rent the entire premises or a portion thereof to mitigate their monetary obligations. Therefore, subleasing is always a “good idea” for the tenant even if the situation necessitating it is not.

For the potential subtenant or assignee the situation is not as clear cut and a number of factors must be considered. Subleases can be a great option for some companies but can also be fraught with danger. Before deciding if subleasing makes sense it’s important to understand the pros and cons associated with this type of leasehold interest and the associated opportunities and liabilities.

Pros

Below Market Rental Rate

Sublandlords must compete with other available spaces in the market. Many subleases are the result of economic hardship on the part of the tenant/sublandlord and, as in all things, time is money. To increase the likelihood of securing a subtenant and decrease the time to do so, many subleases are offered at below market rates. When combined with the other limiting factors associated with sublease deals, this can lead to significant differences between the sublease rental rate and market rates for comparable properties. Subleases, therefore, can present the opportunity for companies to occupy space in prime locations and with amenities that might otherwise be outside their budget.

Shorter (than market) Term

Sublease terms are limited to the remaining term left on the sublandlord’s lease. This leads to the potential for shorter than typical, market (sub)lease terms (less than 3-5 years depending on asset class). This can be a huge benefit to companies that anticipate significant short-term growth and do not want to be locked into a long-term commitment and/or take space they do not need at the time or to others that have concerns about the future of their business or the economy and prefer to limit their exposure.

Furniture, Phones, etc.

Many sublease options are “turnkey;” meaning the space comes with furniture, phones, etc., which in most cases come at no cost to the subtenant. This can significantly lower the upfront costs associated with leasing commercial space.

Shared Common Areas/Amenities

In some cases, sublandlords are willing to “share” their space; providing subtenants with access to common areas within the leased premises such as conference rooms, kitchens, reception areas, workrooms, etc. Subtenants can thus (sub)lease and pay for less square footage while still enjoying the benefit of such amenities.

Southwest

• RBA: 12,422,074 SF
• Vacancy Rate: 11.0%
• 12 Month Net Absorption: 663,000 SF
• Average Asking Rent: $50.94
• 12 Month Rent Growth: 0.3%

The Southwest submarket offers brand-new, trophy space at a discount, which has created a shift in demand away from DC’s downtown submarkets. There is almost a direct, inverse relationship between the submarkets’ fundamentals. Both are delivering significant new supply which puts upward pressure on vacancy rates and suppresses rent growth; however, in Southwest demand has surpassed the increase in supply with 663,000 SF of positive absorption leading to a 3.9% decrease in vacancy over the past 12 months. The submarket’s 11% vacancy rate is the 2^nd highest in DC, behind only the East End, but this is misleadingly high due to the 22% vacancy rate amongst 3-Star properties. Even this metric should see improvement with WMATA recently leasing nearly 150,000 SF of 3-Star space. The 2^nd phase of the Wharf is underway and will deliver an additional half-mile and 1,250,000 SF of new development over the next 3 years, which will consist of a mix of office and multi-family with ground level retail; creating a work-live-play environment. Despite supply-side pressures, demand and strong preleasing should continue to put downward pressure on vacancy rates and upward pressure on rents.

NoMa

• RBA: 11,573,181 SF
• Vacancy Rate: 7.5%
• 12 Month Net Absorption: 614,000 SF
• Average Asking Rent: $51.30
• 12 Month Rent Growth: 0.6%

Despite nearly 523,000 SF delivering in the past 12 months, the NoMa submarket saw a 1.2% decrease in vacancy and a 0.6% increase in rents resulting from 614,000 SF of positive absorption. Affordable rates compared to downtown DC and an abundant supply of green, 4 & 5-Star buildings have attracted federal tenants which have accounted for over 50% of the leasing since 2014. New supply is scheduled to deliver in the coming years but fundamentals should not suffer because one of the two buildings under construction is 100% preleased to the Department of Justice and the other is a build-to-suit for the FCC.

Capitol Riverfront

• RBA: 4,170,351 SF
• Vacancy Rate: 7.5%
• 12 Month Net Absorption: 3,400 SF
• Average Asking Rent: $50.57
• 12 Month Rent Growth: 1.8%

Capitol Riverfront is a small submarket but despite its size it led the DC metro in rent growth in the first quarter of this year at 4% and has the highest occupancy levels of any submarket with average rents over $50/SF. Like NoMa and Southwest, Capitol Riverfront has affordable rents compared to the East End and CBD which has led to increased demand as evidence by strong preleasing. Recent development has been characterized by converting aging/vacant office properties to multi-family; however, the submarket should continue to evolve around Buzzard Point with the 2^nd phase of The Yard which is proposed to deliver nearly 2,000,000 SF of office, 400,000 SF of retail, and more than 3,000 multi-family units. Capitol Riverfront’s fundamentals should remain strong for years to come due to the submarket’s metro accessibility, convenient location, and growing retail scene, which combined make it the perfect work-live-play environment.