Subleasing and the Implications of COVID-19
Assisted by Marissa Aragona
Subleasing – What is it?
Subleasing refers to an agreement made between a tenant of a property, to a third party for a portion of the tenant’s lease contract. Ultimately, the tenant remains responsible for all their obligations in the lease agreement but becomes a ‘head tenant’ for the subtenant, who does not directly deal with the landlord.
Rise in Subleasing as a result of COVID-19?
Recent data released by CBRE indicates that the number of sublease spaces in Sydney CBD have hit a 10 year high as companies reassess their current needs. Generally, sublease spaces are reserved by tenants who expect their business to expand, but given the current economic climate, it seems that many businesses are now moving to subleasing the extra space in their office.
Subleased office space currently accounts for around 0.7% of Sydney’s total CBD office stock for the first time since 2017, after being non-existent for years. Despite unprecedented attempts to stop the spread of the virus, domestic businesses were among the first to feel the implications of the coronavirus, and since Australia has assumed a reduction in economy-wide productivity of Capital of -0.57% (or a third of the reduction in labour). Andrew Ballantyne states, “Sublease availability is a barometer of business confidence.” As an indicator, the volume of sublease space available in the Sydney CBD has not been this high since the peak of the Global Financial Crisis (GFC).
The CBRE has indicated that COVID-19 is not entirely responsible for the increase of subleasing in Sydney, but ultimately as the effects of the pandemic are being felt by all business owners, an increasing number of tenants will look to offload their surplus office space and reduce their costs. According to PWC, it has been estimated that over the course of a year, the COVID-19 pandemic could reduce Australia’s Gross Domestic Product by $34.2 billion. Office spaces which are becoming available for sublease generally come as a result of unforeseen changes in a business who no longer requires the same office space. Alex Johnson, Director Business Development at Tenant Representation Services states “The GFC was responsible for a spike in sublease space, with 100,000 square metres on the market at the commencement of 2009.” It has been predicted that as the economic effects of COVID-19 come to light, they will mirror if not transcend the implications of the GFC.
COVID-19 brings uncertainty to many tenants, and with current social distancing measures in place as well as a majority of companies transitioning to working from home arrangements, the requirements of an office space have been severely impacted. Steve Urwin of Kernel Property Group notes “an increase in sub-leasing is an indicator of a market in distress, and typically precedes a downturn.” It is predicted that the subleasing market in Sydney will continue to rise in the next 12 months. It is crucial for current businesses under leasing agreements to assess their current needs and adopt a plan for the future as much as is possible in these uncertain times.
If you are a tenant or a landlord and require assistance, please do not hesitate to contact a member of Coleman Greig’s Commercial Property team, who would be more than happy to assist you.