By Joshua Burd
Vacant sublease space in New Jersey’s office market has reached its highest level in four years, thanks in part to a string of major corporate relocations within the state in recent months.
But experts say that’s no cause for alarm. For one thing, the amount of available sublease space is still only about half of what it was during the height of the recession in 2008.
What’s more, a sublet opportunity can provide a short-term option for smaller firms or new businesses — especially as landlords gain the upper hand in many submarkets.
“It does give the tenant a chance to negotiate more favorably and then they can have a little bit more flexibility in their terms, especially the ones that are unsure of their growth,” said Matthew Dolly, Transwestern’s director of research in New Jersey. “A sublease may give them a chance to save costs with furniture ready in place, and then they have a good position at the end of the lease to negotiate with the landlord because they’re already there.”
In a recent market report, Transwestern found that vacant sublease space in northern and central New Jersey increased by more than 800,000 square feet in the third quarter. Major companies such as AIG and Valeant Pharmaceuticals International put space back on the market in Q3, as did iCIMS after committing to a major expansion and relocation in Monmouth County.
All told, vacant sublease space now accounts for a little more than 5 percent of total vacancy in the market, according to research by Transwestern. That’s a far cry from years such as 1998, when the sublease ratio was nearly 14 percent, or 2001, when the dot-com bust and the Sept. 11 terror attacks pushed that number up to more than 30 percent.
“When the market crashes and everybody’s flooding the market with subleases, then it
becomes an issue,” said James Postell a partner and city leader in Transwestern’s New Jersey office. But that’s not the case today, he said, with a healthier economy, rising rents for Class A space and higher confidence among office landlords.
“It’s just a dynamic market,” Postell said. “It’s costing more to get into the buildings … so the term is going to be longer most of the time and landlords are not afraid of that.”
It’s partly why the current sublease space is more of “a rare commodity” in New Jersey, Dolly said, rather a drag on the market. He also ascribed the lack of sublet opportunities and sublease deals to the fact that companies increasingly want their own space and that more landlords are willing to let leases expire and renovate their buildings.
Not to mention the availability of co-working spaces as an option to smaller firms.
In buildings that do have sublease vacancies, it’s not always a benefit to the tenant alone. Postell said building owners will often see it as an opportunity to lock in a tenant over a longer term.
“A landlord will look at it after the (letter of intent) has been signed and make a determination whether they want to have a subtenant take the remaining obligation as well as a further obligation,” Postell said. He added that it can be mutually beneficial when the sublease is longer, such as four or five years, and that extending the term may not be necessary.
Many of the sublet opportunities in recent quarters and the months to come will be tied to large corporate expansions in New Jersey. For instance, both Allergan and Daiichi Sankyo made major commitments in Q3 to buildings in Madison and Basking Ridge, respectively, but will each be consolidating from multiple buildings elsewhere the state.
Those types of deals contributed to what Transwestern says was the strongest summer in 13 years for the state’s office market. But Dolly said it remains to be seen just how much of that space will be offered for sublease — and, in turn, how that will affect overall vacancy in the market.
“The one difficulty is, sometimes, when it’s a large firm moving or relocating, you don’t know … how much exactly they’re going to give back,” Dolly said. “And when they really take a look at everything, it could take several quarters or even over a year to see where the space is coming back.
“So you take a look at it, but it could be a while before they decide it’s going to be on the market or they’re going to stay there. So you’ve got to keep your eye on it.”
