Subleasing is having a significant impact on New Jersey’s office market, allowing tenants to leverage the prospect of lower rental rates and shorter terms into better deals with direct landlords, according to a new report by a tenant represenation firm.
That trend is driving renewal activity as landlords become more aggressive and offer better concession packages to match the flexibility of a sublet, according to the third-quarter report by Paramus-based CresaPartners LLC. For existing tenants, that means benefits such as discounted rents and avoiding relocation costs.
“They’re also probably getting shorter-term leases to stay put,” said Tom Giannone, co-managing partner of CresaPartners’ New Jersey division. “Landlords are willing to do the shorter term, because obviously the landlords believe the market has bottomed out, and in three years, they’re going to get a better rate. The market is very interesting, depending on your perspective.”
The report also found while sublease activity saw negative net absorption of 431,000 square feet in the third quarter, direct leasing went in the opposite direction. Giannone said that was indicative of renewal activity and a shift from leasing of sublet space to direct space in the class A office market.
But even as direct landlords respond and become more flexible, sublandlords are making their spaces even more attractive by lowering asking rents, he said. The discount from a direct lease to a sublease grew in the third quarter, from 20.3 percent to 22.5 percent.
“The sublandlord, if you will, realizes that he has to discount his space versus the landlord, so he’s discounting his space now, really, at an all-time high,” Giannone said. He said the trend also has a slight effect on overall rental rates.
While the overall real estate market remains weak, the conditions are causing some tenants to think about their next lease a few years ahead of time, Giannone said. “From our tenants’ perspective, this is a very good market to be taking advantage of.”