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In Focus: Cutting the Cost of Excess Space Might be Easier Than You Think in Today's Economy

Andrew Harnish, CCIM, (Feb/Mar 10)

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If your company is like most in this current economy, it is probably focused on cost savings and also has excess office or industrial space. Space reduction is a common and healthy part of refining your current business strategy. Not only does shedding excess space save on occupancy costs, but your company can also benefit from increased productivity and even a boost in morale.

Shedding such space might end up being easier than you think. Unused office or warehouse space is often even more marketable than space marketed directly by a landlord since your excess space might come with desks, chairs, or racking. Additionally, as a sub-landlord, you may not require a certain length of term, or certain market rents, creating more appeal to another occupier.

Dumping the space can occur in a variety of ways. After reviewing the alternatives, which method will make the most sense for you?

Subleasing: With the help of a real estate professional, market the space for sublease to generate income on that unused area. First check to see if your lease allows subleasing. If it's possible, then consider how your new sub-tenant would enter/exit their new premises. Do building modifications need to be made? If so, solicit the help of a professional space planner to review local codes. Determine the rent. Will the rent include utility expenses and other operating expenses? Of equal importance, will the subtenant be compatible with your business?

Space Sharing: Empty office or warehouse space can often be backfilled with a trusted vendor or customer. Depending on your lease and the landlord's approval, those empty desks or racks could be occupied by an organization already related to your business.

Donation: Yes, there are nonprofit organizations that could benefit from using your empty office or warehouse. A sublease agreement can be written if approved by the landlord, and market rent amounts become a donation item. Oftentimes, the donated value of space can be more beneficial than a simple write-down.

Barter for sublease: To generate the interest of potential sublease parties, keep bartering in mind. Need a new digital copier lease? Perhaps that copier company needs some extra service center space that you have. Need some advertising? You get the idea.

Early Termination with Landlord: Occasionally, a landlord may actually want to recover the space that your company occupies rather than lose control of the space through a sublease; or perhaps the landlord has a tenant looking to expand, consolidate, or even reconfigure their space in the same building. This can sometimes create a win-win if an early termination or relocation can be negotiated.

Blend and Extend: Love most of your space but not the excess part? Want to stay longer than your existing term? If so, your broker might be able to get you out of that unwanted space in exchange for negotiating a longer term for less space.

Buyout: After evaluating the possible costs and headaches associated with subleasing or other methods, there is a often a good chance you will be simply be able to buy your way out of that lease. Given the capital problems faced by some landlords today, many might not mind having a lump sum payment from a buyout, and then roll the dice on getting your old space filled with a new tenant.

Corporations that are outside the real estate business are often surprised by the range of real estate cost-savings opportunities open to them, even in a tight economy. Chances are that any one of the seven strategies outlined above could help you shed excess space in a cost-efficient manner, if you need to do so.

Andrew Harnish is a vice president with Jones Lang LaSalle's Pacific Northwest industrial services group, based in Seattle. He can be reached by phone at 206-607-1730 or e-mail at Andrew.harnish@am.jll.com.

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About the Author

Andrew Harnish, CCIM
Andrew Harnish, CCIM, is an independent real estate consultant. He was formerly the director of Enterprise Development at Johnson Controls WorkPlace Solutions. Previously, he served as vice president with Jones Lang LaSalle’s Pacific Northwest industrial services group, based in Seattle. As a sales and leasing broker/manager at JLL, Harnish completed hundreds of transactions, covering millions of square feet including landlord representation transactions with Boeing, PACCAR, Microsoft, Shaw, Thyssenkrup, Exel, and many others. Representative clients included Georgia Pacific, LG Electronics, Office Max, Verizon Wireless, and Whirlpool.

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In a shared leasing/sublet arrangement should you require the other company to purchase site insurance?

Yes. Just as the master-Landlord requires general liability insurance for the master-tenant to occupy space within the building, a sub-landlord should also require that a subtenant (or co-occupant or vendor) carry general liability insurance. More
- Andrew Harnish, CCIM

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