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December 2016 — Office Properties Quarterly — Page 27
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Market Update
invest more money into the space
because he already is trying to miti-
gate a losing situation, Holm said.
“Finding a user who can use the
space the way it is can be hard,” said
Holm. “If you have a tech firm and
you’re subleasing oil and gas space,
which is all hard offices, that’s a mis-
match – it doesn’t really work.”
Aside from the floor-plan configu-
ration, the type of building itself can
present challenges. The majority of
these spaces are found in traditional
1970s and 1980s vintage buildings
that may not be appealing to every
company, Davidson said.
Tenant improvement allowances
from sublandlords can help get deals
done as can in-building amenities,
said Davidson. And the location is
critical.
If you’re a company subleasing
5,000 to 10,000 sf of open-planned,
brick-and-timber space in Lower
Downtown, your space will probably
be picked up quickly and at rates
north of $30 a sf because options are
extremely limited, Davidson said.
However, if it’s a larger space that’s
office intensive, located in the down-
town core, even at a price of $15 a sf,
that space could sit vacant for a year
or two, Davidson said.
The second common mismatch is
in term requirements – i.e., a sub-
lease space has three to four years
left on the term, but the interested
subleasee only needs it for a year and
a half. Some of these deals get done,
but it’s challenging, Holm said.
With these two hurdles in mind,
the ideal tenant must be a company
that has a short-term need and
can make the existing configura-
tion work, such as a company that
is moving to the market or needs to
expand quickly, said Holm. For these
reasons, it isn’t surprising that much
of the available sublease oil and gas
space hasn’t subleased.
“Some of these sublease spaces,
these bigger blocks, have been sit-
ting for a while,” said Lee. “But that’s
going to change in 2017 for the fol-
lowing reasons: we’ve bottomed on
oil and gas, where the price is right
now; most of the space that’s coming
back to the market has come back in
2015 and 2016 – that doesn’t mean
that there couldn’t be some more iso-
lated situations – but most of the oil
and gas space that’s going to hit the
market has; and I predict that by the
end of 2017, the amount of sublease
space downtown will be cut in half.”
Additionally, relief will be aided by
the fact that 1801 California is now 95
percent leased, which had been the
gorilla of the downtown market for
the last five years because it always
had available space, he said. Many
of the new builds are leasing up, and
demand to be located downtown
and the allure of downtown’s ameni-
ties have never been stronger. This
means that for tech or other growth-
oriented tenants, there will be fewer
options, he said.
“Who are the next tech tenants
that need 30,000, 40,000, 50,000
or 60,000 square feet?” Lee asked.
“Where do they go? I think they go
where there’s value.”They’ll also be
attracted to the flexibility and shorter
lease term options. “The relief will be
coming, for the most part, from val-
ue-oriented tenants who can’t find
growth in new product.”
Holms disagrees about immedi-
ate relief coming in 2017. “I think it
just takes time to work the sublease
space down; you’ve got to go through
the transition,” he said.
He anticipates oil and gas firms
are likely to remain static through
the foreseeable future and wonders
where we are in the overall busi-
ness cycle, which has been enjoying
expansion for about seven years. If
something happens in the economy,
the sublease space could get worse,
not better, he said.
“I’m not saying that’s going to
happen – it’s just a question, and
I’m pretty sure I’m not the only one
thinking about it because of where
we are in the cycle,” he said. The
impact coming from the unpredict-
able political situation also adds to
the unknowns.
“So no, I don’t really see anything
on the horizon that’s going to all of a
sudden fix the sublease situation,” he
said. “It’s just going to have to work
itself out over time and we all have
to cross our fingers that something
doesn’t happen in the economy that
actually makes it worse.”s
CBRE
Oil and gas firms make up disproportional share of downtown’s sublease space.