According to Transwestern research, more than 9 million square feet of sublease space in the DFW market is available. A significant amount of this space is due to the unexpected pandemic.
Subleases typically trade at a discount to what the primary tenant is paying, and some subleases are never leased. Therefore, a sublease may not be ideal.
So, a great question is how does one structure a transaction to prevent the future need to sublease space, or if you do sublease space, how can you make it attractive to others? Here are some helpful suggestions:
A MUTUAL FUND OF LEASE EXPIRATIONS
If you are a larger organization, are you certain of your space needs for every division or every company that you own? If not, consider going “long” on the lease term with the portion of your space need that will predictably not change. You can then commit to shorter lease terms for the space needs that might grow or shrink. That way, you are not locked in with a bad space decision for a long period of time.
DESIGN IN FLEXIBILITY
When you design a space, consider its marketability to others. If you have a larger space, think through how you could easily demise part of it off in a way so that a future sub-tenant would still have a reception, breakroom, or even just a sink.
Some landlords, if properly motivated, will give you a termination right within your lease. This typically occurs in the third year of a five-year lease or in the seventh year of a ten-year lease. Fight for that whether you think you’ll need it or not.
Another tenant right to consider is a Give Back and Expansion Right. The Give Back right works like a termination right, but you are only terminating part of your tenancy. This can be handy if your space needs reduce in the future. Conversely, you might also need an expansion right. Either one will give you flexibility with your future space needs.
Long-term, 100,000 square foot-plus, 10-year leases have their pros and cons. Just make sure you know your rights before signing, or you may be stuck with a sublease.
Michael Griffin is principal at Transwestern and specializes in Tenant Representation.