Commercial Real Estate & Advisory

Subtenants Find Sweet Re-Lease

By Harriet Edleson | April 15, 2002

When A&E Television Networks consolidated its offices last year, the company put 8,200 square feet of space at 228 E. 45th St. on the market. Six months later, Business Communications Management Inc. – which had 2,700 square feet of space in the ninth floor – signed a sublease for the remaining eight years of A&E lease.

AT $36 a square foot, the builtout space was much cheaper than the $50-a-foot options that BCM had been checking out elsewhere in midtown. And it was certainly a lot easier to move three floors up than across town.

“We got a bargain,” sums up President Frank Ahearn.

Tenants like BCM can take their pick of sublease spaces at bargain prices nowadays. Out of all vacant space in New York City, the proportion of space available for sublease almost tripled in 2001, reaching 31% by year’s end, according to CoStar Group Inc. Since then, the percentage had inched up to 32%.

The weak economy, the collapse of dot-coms and the wave of corporate relocations following Sept. 11 has flooded the market with sublease space.

Prices are so low that they’re overshadowing the drawbacks inherent for tenants that sublet space. For example, lease terms are short, sometimes two years or less, and a primary tenant that can’t pay its rent puts the sublessee’s tenancy in jeopardy.

On the other hand, the tenant often moves into nicely finished space and gets the first several months rent-free, as BCM did.
“You have more opportunity to get space that’s been built or out or is in move-in condition,” says Martha Burton a managing director at Insignia/ESG Inc.

On its toes

Culture Club got just such a deal in December at 11E. 26th St., where Crunch Fitness had been holding 11,500 square feet of expansion space for two years. When its plans changed, Crunch subleased 3,600 square feet to the dance club for $36 a square foot, with five months rent-free.

“That space would have gone for $43 a year ago,” said James Bushlik a principal with Adams & Co. Real Estate.

Sublease space these days comes from three sources, says Michelle Stone, the managing director of Sinvin Realty Corp.: parent companies that have pulled the plug on their dot- coms, companies with expansion plans that didn’t materialize, and failed companies whose space had reverted to the landlord.

Bargains are mostly to be found below 42nd Street. In SoHo, space that was $50 a square foot before Sept. 11 is leasing for less than $35; in Chelsea, space that went for $30 to $35 a foot can be had for between $15 and $25; what cost $35 a foot in the Flatiron district now goes for $22.

In midtown south and downtown, graphic designers, music professionals and architectural firms are giddy over the glut of subleased space. Some established toe holds in those neighborhoods 10 or 15 years ago, when the areas were still on the fringe, and have found themselves squeezed by escalating rents in recent years.

This is the moment

“If there’s a deal to be gotten now’s the time to get it,” says Leon Manoff, an executive managing director with GVA Williams. “Commercial real estate is at or near its bottom.”

Landlords can always exercise the recapture clause in a lease which allows them to take back and unused space form a tenant and rent it to someone else. But some prefer to let tenants that are still profitable sublease their own spaces.

“Landlords would be loath to recapture space when they’e collecting $40 to $50 a square foot for it,” says Mr. Manoff.
To protect themselves in case primary tenants default, subleases often insist upon a nondisturbance clause in the lease.