Is it good to be a sublessee?

Tenants often struggle with estimating their own space needs, which may alter considerably, depending on the general economy situation or on the strategy of the mother company. When significant amount of office space becomes empty, sublease can be an economical solution. At the same time it has to be noted though that the owners are likely to constrain and condition the circumstances of the leasing. Below you can read some useful information from ESTON International.

Sublease is more wide-spread and popular in the Western European practice than in the Central-European countries, including Hungary. The evolved economic situation is likely to demolish this trend, though. Larger and larger amount of leasable office space remains unattended due to the effect of the cutbacks, which – indeed – is worth exploiting especially for freshly started companies. They can receive numerous discounts and ‘plug-and-play’ offices, if they scan the market thoroughly. Lots of second-hand offices even come with furnishing, which is very attractive to the new renters.

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At the same time the fact has to be noted though, that the same fit-out is rarely suitable for the new tenant. Therefore if the alteration of the office space needs further expenditure, it may aggravate and delay the negotiations. It is worth choosing an office-unit that has fitting cable and electricity system because changing or increasing the capacity (upgrade) after moving in could be expensive and circumstantial. Besides, own entrance and separated area are such elemental conditions that without them, the new tenant would not function well.

As for the financials, “Landlords are offering aggressive concessions in order to minimize their expenses as much as possible.â€? – says Mr Adorján Salamon, CEO of Eston International Property Advisors – “Fees are sliding down as landlords are getting more desperate.â€?

In case of sublease, those landlords could be the most successful, who already reconsidered their space needs during the crisis spiralling in and dropped the empty spaces on the market among the first ones and furthermore they had the ability to compete with other landlords both in terms of prices and the quality of the fit-out.

In London and Manhattan, where many of the world’s largest financial companies are headquartered, three out of every four office towers now have available spaces – mainly sublets – as a result of the economic crisis.

In this current economic situation it may occur in our country that a multinational company has to make redundant 40% of its employees, as instructed by the parent company. Due to this, they do not need half of their previously leased area and their 5-year-contract has been made 2 years ago, therefore there are still 3 years until expiry. Besides these, break option has not been specified when making the offer.

Here is an example calculation based on the above:
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The empty spaces can only be rented out with a discount (20%) in the current real estate environment; therefore some loss may occur when subletting the area:

2000 sqm x (13 €/sqm/month – 10,5 €/sqm/month) x 36 months = 180.000 € (50,7 million HUF)

Although what is really significant is the cost-saving that can be gained by the successful letting of the premises:

2000 sqm x (10,5 €/sqm/month + 3,5 €/sqm/month) x 36 months = 1.008.000 € (284 million HUF)

In this theoretical case, calculating with 282 EUR/HUF exchange rate, a saving of 7.9 million/month and 284 million HUF could be gained in 3 years, which would be 5-6 times more than the loss: 1.4 million/month, 50.7 million in 3 years.

The sublessee (besides the favourable price) may also have another advantage by not engaging itself for five years – in this uncertain market environment – solely to the remaining lease period. For those small businesses that do not wish to commit to long-term leases, it may possibly mean a ‘once in a lifetime’ opportunity.

It is important to know that – as opposed to general office space offers – sublease possibilities are not public, and are available exclusively through commercial real estate agencies and consultants. Consultants with broad market knowledge are there to help to find the delicate balance between the sublessors and –lessees, creating equally favourable contract conditions for both parties.