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.
Lease Negotiations , Manhattan Office Space , New York Office Space , Office Rental , Office Space , Office Space Negotiations , Office Vacancy Rate , Sublease Office Space , Tenant Representation
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.
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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.
Office Relocation , Office Rental , Office Space , Office Space Negotiations , Sublease Office Space
Have you seen any ads for sublease office space on MySpace? Don’t be surprised if you do. MySpace has around 420,000 square feet of office space in Playa Vista, California with a 12 year lease that is sitting empty. They are currently paying more than $1-million dollars a month for the Los Angeles area office space and have total lease obligation of about $350-million over the 12 year term. Rent is scheduled to go up to nearly $2-million next June. Needless to say, it is not a great time to have excess office space, especially true in California.
MySpace signed the 12-year lease in August 2008, when the number of people using MySpace was blossoming and the social network was running out of space in its Beverly Hills offices. The lease began in June of this year. The problem is that since then is that Facebook has taken off at the expense of MySpace. The parent company, News Corp, announced recently that they will receive $100-million less than expected from Google after failing to hit traffic targets.
News Corp also announced that they will be taking a $180-million write off “as a result of excess facility space that we no longer need.”
Los Angeles Office Space , Office Vacancy Rate , Sublease Office Space
A recent article in the NuWire Investor describes the state of the sublease office space availability throughout the US. In a word, plentiful. In fact, Cushman and Wakefield has pegged the amount of available sublease space at 10.3 million square feet at the end of the first quarter. Cities experiencing the largest increases in sublease office space include New York, Chicago, San Francisco, Denver and Boston.
My educated guess is that there is a lot more sublease office space available than is reported. With all the recent layoffs, many companies have probably not had time or been willing to prioritize getting their excess space listed. Many of these companies have more to worry about than a little excess office space. They are trying figure out how to survive.
A word to the wise. If you are considering renting or leasing sublease office space, be careful. There are many pitfalls that need to be navigated to make sure that your sublease will stand up in the event the sub-lessor defaults. Makes sure to work with someone who knows the ins and outs, otherwise you could find yourself with nowhere to house your employees when you get evicted... without any fault of your own.
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