As Subleases, Coworking, Office Supply All Rise, Landlords Face Ever-Growing Competition

Just a few weeks after Newmark Knight Frank’s David Falk took over leasing at One World Trade Center, the building’s anchor tenant, Condé Nast, dumped 350K SF on the subleasing market. The 3.1M SF building, the tallest in the U.S., is still 25% vacant, and Condé Nast’s sublease is yet another offering for tenants to choose from.

But Falk — who is about to launch a new marketing campaign for the building that highlights the millennial-focused companies already in the tower — said he is not worried about extra competition.

“You are always competing in some regards,” he said. “[Condé’s space] is already built for you. We’re building space in spec [suites] that will be open creative space, and they can negotiate and grow over time."

Condé Nast’s offering isn’t the only sublease block available right now. At 55 Water St., Liberty Mutual Insurance Co. is offering 130K SF. At 4 World Trade Center, there are two floors up for grabs as sublease space from the Port Authority of New York.

The sublease availability Downtown hit 2.4% in April, the highest it has been since 2010, according to data from Colliers International. In May it slipped slightly back to 2.3%. It hadn't been above 2% since 2010.

In Midtown, by comparison, that availability rate has been below 2% for the last three years. Midtown South has slowly been tightening over the last 12 months, and as of May it was at 1.7%. Colliers does not include flexible office and coworking offerings in its sublease figures.

That uptick in Downtown office sublease availability comes as more office space continues to flow into the Manhattan office market, making a competitive market even tougher. More than 7M SF of office space from unleased portions of new construction to large blocks of space in existing buildings will become available this year, according to Colliers' most recent figures. Meanwhile, marquee offerings like 3 World Trade, which has in excess of 1M SF of office left to lease, are reaching completion.

Brokers told Bisnow that while extra sublease space on the market does give tenants a wider array of options, plenty of tenants want direct space. While there are significant benefits, both cost and otherwise, to taking sublease space, brokers working with a landlord can have its pros too.

"The reason why subleases are attractive is they trade at a percentage of what direct space goes for … [tenants] can get a deal,” Falk said. “The negative is that the subtenant has to agree to the exact sublease term … If you want options and flexibility, you can’t get that.”

CBRE Tri-State CEO Mary Ann Tighe, who is part of the marketing team at the newly opened 3 World Trade Center, said there is no doubt that tenants looking for space in the World Trade Center area would consider both sublease and direct space. Tighe brought Condé Nast to One World Trade in 2011.

“Any firm with good representation will look at both opportunities,” she said during an interview with Bisnow at the opening of 3 World Trade Center last week. “The Condé Nast sublease space is great opportunity. It’s built space, something we don’t have at Tower Three … [3WTC] is tabula rasa.”

Brokers said that as well as a price-per-SF discount, tenants taking sublease space get a reduced security deposit, and won’t be faced with build-out costs. What’s more, in some cases, sub-landlords offer concessions just like landlords are now doing at record highs in the city.

Colliers New York Tri-State Executive Director Craig Caggiano said despite the uptick in sublease space, Downtown still has “pretty healthy numbers.” He noted that last month J.Crew inked a deal to take 350K SF of sublease space from Bank of New York Mellon at 225 Liberty St. The retailer is reportedly paying rents in the mid-$50s per SF for a 16-year lease.

Some brokers said there will be a negative impact on the overall market.

“It brings the whole market down [when] you have a lot of major spaces being put on the market,” Cresa Managing Principal Peter Sabesan said.

He said there are plenty of office users who still feel uncomfortable taking space from another company.

“You have to make sure they are in business,” he said, adding that many tenants changed their perceptions after the collapse of Lehman Brothers and Bear Stearns in 2008.

“You do the best you can," he said. "In some ways, you are rolling dice.”

Other brokers said there are some companies that would consider sublease space Downtown, but they won’t qualify for the Relocation and Employment Assistance Program if the lease terms are too short.

Lee Associates principal Kenneth Salzman said sublease space is attractive to companies that are part of the growing trend of seeking flexible office or coworking space.

Companies like WeWork and Knotel have capitalized on that trend, with coworking and flexible space operators now now taking up 9M SF of office space in Manhattan, according to research from CBRE. But some tenants will always prefer to sublease space from other companies over leasing space from a coworking company.

“A traditional space presents a better option than coworking because the company is able to maintain its identity, a feature that is often lost in coworking or flexible work,” Salzman said. “You can have your own headquarter and have branding based on your own identity.”