Companies are downsizing. And whether COVID-19 has caused a business to grow, pivot or shrink, the immediate effect of the new-world is that companies are declaring that they will not need as much space going forward.
There are limited options for a tenant with a remaining lease tail who wants to rid themselves of excess space. Typically, they'd follow this process:
Therein lies the opportunity for tenants seeking a new space at discounted rates.
Unsurprisingly, the commercial agencies, usually the source of market data, are so far withholding the Q4 2020 statistics. Even so, it’s common knowledge that subleasing has surged across Australia's east coast office markets as companies reassess their current and future needs.
The amount of sublease space available in the Sydney CBD and Melbourne CBD by Q3 2020 had surpassed the amount available (90,000sqm in each Syd. & Melb.) at the peak of the Global Financial Crisis (GFC).
In Sydney, by Q3 2020, the volume of sublease space hit a record high of 157,853sqm. This represented a 90% surge in five months, up from circa 105,701 sqm in June and 82,739 sqm in March. It's estimated that around two-thirds of this stock is concentrated in prime grade buildings and driven mostly by white-collar professional services, financial services and insurance and technological sectors.
Melbourne’s sublease vacancy has also spiked substantially, from 0.7% total stock at the outset of 2020 to 2.3% (circa 117,200 sqm) in October 2020. Since then, this number has continued to increase, particularly in Q4. Unsurprisingly many companies are waiting for 100% occupancy of offices to be allowed before making a final assessment of space requirements. Accordingly, we expect a further surge of Sublease space around Q3 2021.
This upward trend is not limited to the Eastern seaboard either. In Perth CBD, for example, we saw sublease availability increase by 17,000sqm, reflecting a 59% spike over the five months to August 2020.
In fact, the only Australian market where we have not seen a new sublease market emerge is Adelaide. This is chiefly due to limited new supply and the fact that large corporations do not tend to occupy large spaces in the Adelaide market.
When it comes to commercial sublease agreements, both sublessors and sublessees take risks; the most significant being the risk of default:
So, the biggest consideration is the financial security of both parties. In the context of COVID-19, risk of default has magnified due to the threat of business failure, particularly as the government withdraws business support measures.
You can learn more about the pros and cons of commercial subleasing here.
Despite some inherent risks, subleasing remains an excellent option for tenants looking to reduce their office footprint, increase cash flow or secure a plug-and-play space with flexible conditions. But there are some things that both parties should consider.
Considering going down this path? It can be a great option for tenants looking for short-term, plug-and-play solutions at discounted rates. But it's not the only strategy for those looking to get rid of excess space. This is particularly true for those with less than 12 months left on their commercial lease.
In either case, subleasing should form part of a detailed property strategy. And both parties should approach it with an air of caution and seek the help of a real estate professional.
Tenant CS represents tenants, not commercial property owners. We're fierce negotiations, independent and conflict-free. So, ask us today how we can assist you!