According to a recent article in Gigaom.com coworking space costs less for a user than using a coffee shop if you take into account the cost of buying drinks and snacks.  According to the study quoted, the average monthly cost of using the facility by way of a flexible desk is only $152 / month. A 24 hr / 7 days per week plan would run around $207.00 / month and a permanent 24/7 desk would be $387.00 / month.

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The article below is one that I wrote in February 1993.  I found it interesting that it still holds true not only for the Seattle are, but most office markets, too.

Almost 20 percent of the vacant office space in Bellevue and Seattle is available for sublease. Massive corporate restructuring, downsizing and mergers mean that many Puget Sound firms need less space than anticipated. Yet they find themselves locked into expensive long-term leases. It makes a lot of sense to find a way to recoup on space that would otherwise stand empty.

Even at 20 percent, sublease space in the market is underestimated. When any space is vacant or is soon to be available due to a pending move, it is included in our vacancy rate analysis. But often sublease opportunities are poorly marketed and publicized. Space with less than one year remaining in the lease is often not marketed at all. So tenants willing and able to relocate and go through the complications of a sublease transaction will find plenty of attractive possibilities around town.

"Attractive" is not a word you would hear from building owners, who often view subleases as bad news. Rates are typically at least 15 percent lower than direct leases. An owner therefore finds himself competing with existing tenants for new tenants. It's an uphill battle, because the landlord is usually at an economical disadvantage.

Rental rates for sublease space in some of the newest buildings in downtown Seattle, for example, can run as little as $12 per square foot, complete with full service. This is a whopping one-third savings over the average downtown rate of $18 for similar office facilities.

Garth Olsen of Cushman & Wakefield, leasing agent for the remaining 100,000 square feet of AT&T sublease space in the AT&T Gateway Tower downtown, says that his firm is asking between $14 and $15 per square foot. This includes a generous tenant improvement allowance with a lease that runs through the year 2000.

On the other hand, the landlord has a starting price of $18 per square foot. The building is only 54 percent full after two and a half years. Having to compete against your major tenants to lease space adds insult to injury.

Getting a Good Deal

Despite the obvious economic benefits, there are some challenges in negotiating a wise sublease. If costs were equal, it would be more desirable to deal directly with a landlord than to sublease, since there are fewer risks and complications involved. Direct lease space negotiations are two-way between landlord and tenant. In a sublease arrangement, however, transactions become three-way, with all the inherent pitfalls of any triangulated relationship. "In most leases, the original tenant is still ultimately liable for rental payments, even after the space has been subleased," said Craig Michalak, a prominent Eastside broker. "If the subtenant pays less than the face rate of the original lease, the original tenant must make up the difference." He points out that the subtenant, in turn, needs to be concerned with the financial stability of the original tenant. The subtenant may find themselves stuck making overage rental payments, or could end up with default problems that cannot easily be cures. In a worst-case scenario, they could be forced to move.

For companies like the Hogan Company, a Bellevue communications firm, subleasing 7,800 square feet of office space for the past three years has been a good decision. "I looked at everything available that was the right size for us," said Walter Hogan, president. "My final decision was based on cost. We were able to move into our space as is, and saved more than 20 percent over doing a direct deal. I'm very pleased with how everything worked out, and highly recommend a similar arrangement to others."

Hogan was lucky. It's unlikely that the layout and site of an office will exactly match a new tenant's needs, especially in offices greater than 5,000 square feet. When the space can't be used as is, an appropriate allowance for tenant improvements needs to be included in the sublease. Otherwise, the 'financial benefits of a reduced rental can quickly vanish. A typical downtown tenant improvement allowance is around $25 per square foot. Using a 10 percent annual interest rate over a five-year lease amortizes to $6.37 per square foot per year in rent. In other words, more than $6 of each rental payment goes to help the landlord payoff tenant improvements. When the remaining term is less than three years, these expenditures can cause the effective rental cost to increase significantly if the tenant has to foot the bill. What seemed at first glance to be a good deal becomes a very expensive proposition.

Remaining terms of less than two years are the norm for sublease space. But spaces offered by major users often have remaining terms and expansion options that reach well into the next century. In these cases, it's worthwhile to calculate very carefully the pros and cons of various tenant improvement options. Long-term subleases can make sense even when the subtenant ends up paying for improvements. When improvements are amortized over many years, the results of a sublease can become much more beneficial than anything that could have been obtained directly through the landlord.

Two of the larger companies in town with large amounts of sublease space available are AT&T, with 100,000 square feet, and Seattle First National Bank's Security Pacific Bank space, with 200,000 square feet. AT&T's space became available due to a reorganization of the company's work force. SeaFirst's space is the result of their well-publicized merger with Security Pacific Bank. Both leases have a long time to run...;, about seven and a half years for AT&T, and about 25 years for the bank. In SeaFirst's case, there is little probability of finding firms willing to commit for a quarter of a century. So they can be expected to be flexible on the length of term for subleases.
SeaFirst is in the process of finalizing their leasing strategy and selecting a leasing representative. They have already done well, subleasing 150,000 square feet of their original 350,000 square feet to West One Bank and other smaller subtenants. SeaFirst views their property more as owned than as leased. They have therefore decided not to disrupt the market by undercutting prices for competitive space. In other words, they are taking a long-term ownership approach, rather than opting for a quick fix that could result in both hard feelings and financial drawbacks in the long run.

Outstanding opportunities await any business owner willing to consider subleasing space. But risks are certainly present too. Anyone interested in investigating subleased property would be wise to consult a real estate professional as well as an attorney; to make sure that the deal is really as good as it looks.

According to a recent report from Colliers International, it appears that the U.S. office space market has turned the corner and absorbed 6.5 million square feet of office space during the third quarter of 2010 compared to only 1.8 million sq. ft. of absorption activity for the previous quarter.

It was the major office space markets that showed the largest office leasing absorption for the quarter. Among those, the Washington, DC office space market showed over 882,000 square feet of net absorption during the quarter, resulting in an office space vacancy rate of only 11.6%, the lowest in the nation. The Washington, DC office rental rate increased to $52.32 per square foot, an increase of $1.06 over the previous quarter. The rental rate and absorption gains are mostly due to the addition of new government jobs and a limited supply of new office space coming on line during the quarter.

Also of interest, during the 3rd quarter the amount of sublease office space nationally continued to decrease, to only 7.6%of total office space vacancy compared with 8.2% at the end of the 2nd quarter.

The national office space vacancy rate decreased slightly from 16.3%to 16.2% during the third quarter, but it still is above the 16% at the end of the 3rd quarter 2009.

Find Office Space

Shadow Office Space is office space that is currently under lease by a tenant, but which is not being used due to layoff of employees. It is also not listed for sublease or identified as available space. This could be space that a company is holding so that as the economy comes back they will have the space they need to get back to their “normal” workforce.  Most office leases are long term leases and shadow office space could be that space within a leased premise that is not being used, but is not suitable for sublease due to the layout and / or security concerns of a company.  It is also space that will be put on the market, but has not yet been offered.  This is space that is hidden from the vacancy rate statistics we hear about.  It can be compared to the unemployment figures that come out, but do not include the underemployed or those that have given up looking for a job. In other words, it should be added to the published vacancy rates in order to determine the true office vacancy rate.

Shadow office space will most likely the first space to be filled as the economy comes back. This will also distort the absorption rates. With no record of it being vacant, there will be no record of it being filled with new employees. When the office recovery finally does come, it will be under stated. 

How much is out there? This is a very tough question to answer without a large survey of businesses to determine their current space usage related to their leased space. Based upon our discussions with local OfficeFinder Tenant reps, the true vacancy rate, including shadow space would be 1% – 2% higher than the stated rate in any given market. That means that the Manhattan market would have in excess of 2.5 million square feet of shadow office space; not an insignificant amount of space.

From our recent post, US Office Vacancy Rate Hits 16-year High, the stated vacancy rate was 17.2%. Including a Shadow Space factor, the real US Vacancy Rate would be close to 19%.

What this means to tenants is that there are lots of great opportunities that they can take advantage of. One of the biggest problems for them is the ability to cull through the many options to find the right alternatives.  That’s where engaging a tenant representative comes in. They know the market. They know the landlords. They do this every day and can help tenants find and negotiate for the best options available. Best of all, tenants get representation at no cost to them. Listing agent fees are split to pay for their services.

Find office space.

With all of the available office space available throughout the country And the economy still in the dumpster, many business are looking towards subleasing as a way to save money on their office rent. In almost every case a tenant can save anywhere between 10% and 50% off the current market rents through a sublease. It sounds like a good deal and in many cases it is, but as in all investments the return (savings) is related to risk. Subleasing space is a risky proposition.  One in which it is very important to have a qualified expert assisting you to make sure you avoid costly mistakes or even worse, potentially cause your business to go under.

What are the risks?

First and foremost, what happens if the former tenant sub-landlord goes bankrupt? Most leases have a clause in them cancelling the lease or giving the landlord the right to cancel the lease if the tenant declares bankruptcy. If this happens and you do not have any protections, you will either be out on the street or paying higher rents.

What happens if you are paying rent to the former tenant sub-landlord, but they are not paying the landlord the full amount of the rent due? They are in default of the lease and therefore you are too.  What happens if the landlord decides to give them the boot? Will you be able to stay in the space at the same rate you are currently paying?  There is no guarantee that your sub-landlord will fulfill their obligation to pay the remainder of the rent or even the rent you pay to them to the landlord.

Although rare, hazardous waste can be another issue, especially if there is land involved. If your sub-landlord caused any hazardous waste, you could find yourself liable to clean it up. Cleaning up hazardous waste is not cheap.

There are ways to protect yourself when you are subleasing office space, but each sublease brings on different nuances that will need to be handled uniquely. A good real estate professional, such as the ones we have with OfficeFinder, will be able to mitigate the risks for you through a number of different means. The most important one would be a no-disturbance agreement signed by the Landlord and notarized. Not all landlords will agree to one, so other means of protection will need to be developed.

If you decide to sublease office space, make sure you protect yourself by partnering with a qualified real estate professional. You will be glad you did.