COMMENT Here is the problem: you’re a tenant leasing office space, but you aren’t using a chunk of it. Perhaps you have introduced hybrid working since the pandemic, and there isn’t the same volume of people using the office. Or maybe you had excess space in anticipation of expansion but that is no longer needed.
Regardless of the reason, that grey space is a cost on the balance sheet; rent, rates and service charges all still have to be paid.
Meanwhile, there is rising demand for flexible space, so an obvious solution would be to sublet the excess space to a co-working or serviced office operator, right? In theory, yes. But while it might seem like the easy answer to a grey space problem, it isn’t easy to do.
Throwing the doors open
The first problem is the lease’s alienation clause, which restricts subletting. Whether you are looking to sublet a whole floor or part of a floor, it is unlikely a lease will allow for multiple, ad hoc lettings, which would include a flexible workspace/co‑working space operator.
It doesn’t rule it out completely as an option, but what it means is that subletting is at the behest of the landlord. And from a landlord’s perspective, there are a number of potential issues.
A building will be let to one or more specific companies which have been vetted ahead of the deal; the landlord knows who is going to be in its building. However, subletting may be viewed as akin to throwing open the doors to anybody, particularly if it’s to a flexible space operator.
The building owner might also have their own space to let, and if the market for standard space is muted, then the grey space adds to the competition. While the tenant’s space can’t be offered at less than market rent, they could offer more incentives, such as a longer rent-free period.
However, subletting to a flexible space operator could be advantageous to a landlord for two reasons. The landlord may be targeting different occupiers for conventional leases and, therefore, not competition. And, if approached in the right way, it could be an opportunity for both the tenant and the landlord.
New channels
A building with a flexible space provision as part of its offer can be attractive to tenants if it gives them access to additional amenities and space. If a landlord is looking to add co-working as part of its offer, this could be a less risky and less capital-intensive way of doing that, so long as it is involved with the deal or licence agreements. If the contract is between the operator and tenant subletting the space, then the building owner doesn’t have any control over the space and who can use it.
Done properly, a joint venture deal or management agreement means both the tenant trying to offload grey space and the landlord benefiting. The tenant gets to reduce the cost of redundant space on its balance sheet, and the landlord can boost a building’s offer with flex space but with less risk.
Landlords may even find they will also be able to offer their own, more conventional space through online broker channels, alongside the flexible workspace in the building, to potential occupiers as well as through traditional marketing agents.
Tenants looking to offload excess space to a flexible workspace operator need to have their eyes open. They need to consider the alienation provision in their leases and what effect subletting the space will have on themselves, the operator and the landlord. However, for some tenants, it might just be the right solution that solves more than one problem.
Will Kinnear is founder of Hewn
