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Got a few square metres?

Office & mixed-use development
For many years subleasing was the only option for companies looking for small, ready-to-use office space that could be moved into immediately. Now flexible space operators are actively looking for this type of tenant. Does this mean the collapse of subleasing? Or maybe its character is about to change?

The record demand for offices in Poland, the falling vacancy rate (less than 10 pct in major cities, 8.25 pct in Warsaw) and the growing popularity of pre-lease contracts for space under construction – all these factors point to the fact that we are now in a landlord’s market and the availability of offices on the market is limited. It would seem, therefore, that subleasing, which naturally fills the supply gap, should be experiencing a renaissance. What do the numbers say? “Available subleases numerically make up an average of around 10 pct of all currently available leasing options in Warsaw. When it comes to the ratio of sublease transactions to the total demand, the figure doesn’t reach more than 1.5–2 pct, but it should be remembered that such data only emerges when sublease offers arise on the market. Many of these contracts are concluded within a group of companies or as subleases with neighbouring companies in the same building – deals that are not registered by the agencies. When it comes to the ratio of sublease transactions to the total demand, the scale of Warsaw deals shows that subleases represent a slightly lower market share than on regional markets – which doesn’t mean that there are fewer of them in terms of quantity. The largest cities certainly have the broadest base of subleases,” explains Magda Kępka-Gacioch, a senior tenant representation negotiator in the office department at Cushman & Wakefield.

Who does it suit best?

Subleasing is an attractive alternative for companies looking for space when it’s important to move in quickly. The option of moving into prestigious buildings or locations where there are no office units available from the buildings’ owners is certainly tempting. And as companies grow, they have increasingly urgent staffing needs and so, because there is no shortage of vacant offices on the market, space is often leased with future recruitment in mind. “In such situations, tenants often decide to sublease their offices, mainly in order to minimise losses or generate additional savings. This market is created by companies whose demand for office space has fallen during the lease period as well as those that – in expectation of future expansion – have leased larger office areas under the assumption that temporary subleases would ensure that the offices would be able to fulfil its future needs,” explains Edyta Turowicz, a senior consultant in the tenant representation department at JLL.

The sublease mechanism becomes clearly visible when it comes to the IT sector. “This sector is growing rapidly and thus requires continuous recruitment or the acquisition of companies along with their employees, and this means providing them with enough space to work in. It’s not uncommon outcome of winning a contract that you are forced to act quickly to execute it and complete the make-up of the project team, with all its members preferably sitting together in one place. If a company can’t rent additional space in the building it already operates in, it then usually decides to rent new, larger offices elsewhere. When the date that the lease comes to an end becomes known, the process of finding a subtenant begins,” explains Jakub Denus, the leasing manager in the tenant representation department of Knight Frank.



“Subleasing is going to be difficult or even impossible in coworking centres since the use of flexible office space is based on membership agreements rather than lease agreements,” admits Adam Lis of JLL

“Changes within companies should also be taken into account – offices that are available immediately for a short period of time are often highly sought after. Subleases are the answer to such demand,” believes Aleksandra Duda, a tenant representation negotiator in the office space department at Cushman & Wakefield. Subtenants are also companies that are not sure how their businesses will grow in a few years – subleases do not require long-term contracts and no fit-out costs, so they are come with more security. “Such companies are often start-ups that already have a few or several employees but are not able to predict how they will grow. It also happens that a sudden reduction in their workforce reduces their demand for space. Then the ideal solution is to find a subtenant for the vacant space and to eventually find someone interested in the entire office if the company intends to move to a different, smaller location, but with the lease agreement for the previous headquarters still in place,” adds Jakub Denus.

According to the consultancies, subleasing can be done in virtually all types of office building – from A + to B- standard – and is equally popular in all major Polish cities, including the really ‘hot’ office markets, such as Wrocław or Kraków. The consultants also say that the sectors widely recognised as thriving (e.g. the banks, insurance companies, hi-tech, IT and e-commerce) are more likely to sublease their vacated space – since they can simply afford to relocate to the latest (and often the most expensive) office buildings, regardless of ongoing lease agreements in other locations.



“The scale of Warsaw deals shows that subleases represent a slightly lower market share than on regional markets,” says Magda Kępka-Gacioch of Cushman & Wakefield

Who is it profitable for?

In addition to the shorter lease periods, the rents for subleased space are attractive as they are often lower than the actual rent, since the point is to attract the subtenant as soon as possible to reduce office maintenance costs. “I always explain to my clients who are looking for a subtenant that they should not and even cannot expect the subtenant to pay 100 pct of the rate that the main tenant pays to the landlord. Subleasing is simply about limiting the losses that you incur, such as those involved in the relocation of the business,” points out Jakub Denus of Knight Frank.

“Rents in subleases are usually up to 20 pct lower than is usual on the rental market. It also happens that they can be even lower due to the bonus for the subtenant having to accept space with the same conditions as the main tenant had – it is rarely the case that an additional budget is required for the arrangement work in the subleased space,” adds Edyta Turowicz of JLL.

However, subleasing also has its darker sides – such a contract cannot last longer than the main tenant’s contract. So if your ‘host’ decides to change its headquarters, you will also need to pack your things. The lack of flexibility also applies to the arrangement of the space – subtenants have to accept that adjusting the space to their needs may require investment expenditure and most of the fit-out work has to be agreed with both the tenant and the building’s owner.

What do the owners think?

It might seem that subleasing would not be looked upon kindly by the owners of office buildings, since the tenant has pay the full rent anyway and additional building users generate higher maintenance costs and require additional services, such as including them in the access control system. Furthermore, the tenant is in a sense competing with the building’s owner, as the payments from the subtenant bypass the landlord’s account. “It’s usually the main lease agreement that stipulates whether a sublease is possible and on what terms. In most cases, the consent of the landlord is required, so it’s a good idea to make contact with the owner of the building and lay out your business goals at the initial stage of finding a subtenant,’’ advises Edyta Turowicz of JLL. “As a rule, landlords generally agree to the sublease, although this is not always problem-free. It may turn out that another tenant in the building has a non-competition clause in their agreement, which could exclude a large number of potential subtenants. Furthermore, the subleased space is in competition with the space provided directly by the landlord, so the landlord wants to know what the rents are in such situations,” explains Edyta Turowicz. “The landlords normally agree to sublease provisions but they can try to limit the size of the subleased space by specifying its percentage in relation to the total leasable area or by introducing a minimum rent that can be offered by the tenant so that this doesn’t represent competition for them when it comes to leasing the building,” adds Magda Kępka-Gacioch of Cushman & Wakefield.

Tenants usually don’t need to obtain permission to sublease space if this involves a company in the same group – all they need to do is to notify the owner of the building in such a case. However, subleases are not generally welcomed by landlords because they could be a signal that the tenant doesn’t intend to extend the lease and is waiting for its expiry, which will mean a future vacancy in the building. However, the owner will support internal subleases, that is, in such situations when other tenants are willing to rent additional space in the building that the owner cannot provide. And in this context subleasing is actually a mutually beneficial option – it often prevents a tenant that wouldn’t be able to grow their business from moving out. “Building owners also don’t withhold subleasing consent because a subtenant in the building can often be a potential tenant – if they settle in the building, they can often remain there after the sublease period,” points out Aleksandra Duda of Cushman & Wakefield.



“The IT sector is growing rapidly and thus requires continuous recruitment or the acquisition of companies along with their employees. Subleasing is often an option here,” claims Jakub Denus of Knight Frank

What about coworking offices?

While classic subleasing is usually the result of a – let’s call it – random event (a temporary excess of space or a temporary lack of offices), institutional subleasing, that is, flexible offices, has been increasingly stepping into its shoes. “The ‘flexes’ also provide space you can enter immediately and which, in addition to a flexible lease period, is tempting to potential tenants due to its modern design, great location and the attractive range of events laid on for the community and tenants,” insists Edyta Turowicz, a senior consultant in the tenant representation department at JLL.

Is it possible to carry out a ‘squared sublease’ – the renting of space to a subtenant by the coworking operator that in turn leases it from the building owner? “Subleasing is going to be difficult or even impossible in coworking centres since the use of flexible office space is based on membership agreements rather than lease contracts. It is of course possible to terminate the contract ahead of schedule in ‘flexes’, but the tenant is not able to propose someone else in their place,” admits Adam Lis, the flexible office solutions manager at JLL.

However, on Western markets kinds of office hybrids involving flexible offices with some of the features of subleasing are already emerging. On this basis, one could cautiously assume that traditional subleasing is going to be – at least to some extent – absorbed by ‘flexes’. “For one of our clients we carried out a scenario analysis for the leasing of the space in one of London’s office buildings, under the assumption that the leasing for the entire building would be divided between our client and a flexible space operator. A three-storey ‘buffer zone’ was to be built between them in order to enable our client to take over the office space, seasonally or permanently, for their own needs. Thus the operator would manage the ‘surplus’ and our client would not have to contend with any vacancy resulting from it,” reveals Adam Lis of JLL. “We also analysed a different situation on the office market of one of the capitals of the CEE region – in this case our client intended to reduce its team by several hundred people over a few years. One of the scenarios, therefore, included the gradual hand-over of the office space to an operator that would lease adjacent floors,” adds JLL’s expert.

And what about the future?

“The share of subleases in deals on the office market has been decreasing year-on-year across the country. Those companies subleasing their offices will face a situation in which they will somehow have to be able to compete not only with commercial landlords but also with coworking operators, as the latter makes an increasing bigger mark on the Polish office market. Companies looking for space that’s available straight away may be more willing to turn to coworking operators, where the interesting layout and range of amenities due to being part of a community are provided together with the flexible duration of the subscription,” believes Magda Kępka-Gacioch of Cushman & Wakefield. “However, there will always be those for whom a traditional office is the more attractive option,” adds Aleksandra Duda of the same department at C&W. “It’s difficult to predict the future of subleasing but, so far, its market share doesn’t appear to be significantly increasing or decreasing. In cities where the flexible space market is undergoing more dynamic growth, companies will certainly find it more difficult to attract subtenants,” admits Edyta Turowicz of JLL.

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