Bringing on the subs

Sub-letting: a fashionable subject dreamed up by agents, or a notable – although somewhat embarrassing – trend on the property market? Tenants are now tightening their belts following the end of the boom years

Ewa Andrzejewska

Gleeful optimism was the rule of the day on the Warsaw office market in 2007 and 2008. Office building owners and their tenants seemed convinced that the boom would go on forever and rents would grow almost from day to day, reaching unnatural heights, particularly when compared with other capital cities in our part of Europe. Today, property owners can only look back in envy at those days when rents were as much as EUR 40 for each occupied square metre. Tenants are currently looking for cost cutting measures and are reducing staff instead of employing new workers. The result is that they need less office space. One way to generate savings in an empty office is through sub-letting. Bartłomiej Hofman, managing director of Europolis Real Estate Asset Management, which in Poland manages the Warsaw Towers, Sienna Centre, Saski Crescent, Saski Point and Bitwy Warszawskiej office buildings, as well as Europolis Park Błonie and Europolis Park Poland Central warehouse parks among others, remarks that: “We have had sporadic cases when our tenants have approached us with such enquiries. I would call it a sideline hyped up by estate agents.” But however you regard the practice, it is a much debated subject on the market, where the nervous fuss generated by those looking for sub-lets and attractive prices is becoming a fact of life.

Asset management director Andrzej Mikołajczyk and marketing and leasing manager Daniel Bienias of Mahler Property Services (MPS), of which Mahler Project and CA Immo International are shareholders, point out that sub-letting with procedural foundations (to obtain an address for a registered business in the case of a new company in a capital group) is a frequent phenomenon which has a history going back a long time. MPS manages the Polish properties of its shareholders, i.e. the Warsaw Financial Center, the Wspólna 47/49 office building and Ochota Office Park (in excess of 100,000 sqm). Andrzej Mikołajczyk feels that: “The importance of sub-letting for economic reasons, that is when a major tenant rents part or the whole of a contracted area, intensifies when the economic situation deteriorates, when companies have to trim costs and make savings. This phenomenon picked up momentum in the last four months of 2008.”

To consent or not to consent 
Đ that is the question

How does a property owner react when a tenant asks for consent to sub-let? This issue is covered by most tenancy contracts, although it is often the case that the parties have not been precise in the wording. Daniel Bienias of MPS goes into greater detail: “More often than not the model of contract wording is the lessor’s declaration that he will not refuse to sub-let without justified cause, a statement which leaves a multitude of doors open to both parties. We usually try not to make things difficult for tenants as long as our consent does not lead to potential problems for ourselves. The overriding criterion here is the financial health and the rating of the sub-letting party. Finance is the major problem facing a tenant who has decided to sub-let – since it is the tenant who bears the responsibility to the lessor for all liabilities stemming from the tenancy contract – although the class and image of the sub-letting party are important for the image of the property as a whole.” Bartłomiej Hofman describes how he once agreed to sub-let an office to a construction company in an office building in the city centre. The unfortunate result was that men in muddy wellies were walking around the corridors in a class ‘A’ office building… something of a lesson for the future.

Agents are increasingly being asked for help in the Central Business District by their tenants and have noticed that, until recently, transactions were for relatively small areas (several dozen or several hundred square metres). Agents reveal that there have been a few big deals for several thousand metres sub-lets. For instance, one bank leased more than 5,000 sqm in Warsaw’s Mokotów district to be able to focus its operations in one location, but over time its plans changed and it is now looking for sub-tenants for the space. It must be remembered that the agencies, too, have been suffering the effects of the credit crunch. Companies interested in sub-letting space include the DTZ agency, which moved to the Lumen office building (Złote Tarasy complex) in late 2007, and also King Sturge, which signed a tenancy contract for space in the Skanska Property Poland project on al. Jana Pawła II. “Due the development of all major areas of the business, the company has taken new premises in Atrium City from June 2009, a brand new office building located in the centre of Warsaw. At the time of signing, we intentionally took more space than we needed to accommodate the rapidly expanding property management and project management teams. This was partly due to the company’s integration with Caledonian Project Management, but also the increase in the number of orders being won throughout the business. We always planned to sub-lease around a quarter of the space; however, due to the credit crunch we have scaled back our expansion plans and decided to sub-lease more space. This is a short term response to market conditions, which will give some immediate savings but also greater flexibility in the future. We can offer any interested tenants between 350 and 900 sqm on very attractive terms,” relates Jason Sharman, managing director of King Sturge Poland.

Percent or perhaps per thousand

The Warsaw Research Forum, an informal unit researching the office property market in Warsaw (including representatives of estate agencies), has no precise data for sub-letting in Warsaw. Space offered for sub-letting is not included in the vacancy statistics since, according to the actual contracts, this was leased to primary tenants – but this does not necessarily mean it was occupied by them. Anna Staniszewska, EMEA North research coordinator and consulting and research director for DTZ, argues that: “Sub-letting contracts are often concluded outside the regular market, where data is unavailable. The space designated for sub-letting has increased dramatically in the last six months, as evidenced by the number of offers being passed to agencies. DTZ believes that there is more than 50,000 sqm of space in Warsaw which could be sub-let.” The volume of leasing transactions in 2009 might fall to around 300,000 sqm, compared with the 460,000 sqm in 2008, due to weakened demand.

Two sides of the same coin

Do the owners of office building have to treat sub-letting as some kind of competition? Bartłomiej Hofman has this to say: “Sub-letting is always competition, but a large supply gap exists on the Warsaw office market, which will be the foundation from which rents will spiral when sub-letting offers peter out. In my opinion, the downward correction of rents, which is mainly occurring in central Warsaw, stems from a drastic subsidence in the activity of tenants and not from any expansion of sub-letting.” In his view, sub-letting rates are 20-30 pct below rents offered by owners. Andrzej Mikołajczyk adds that: “As we see it, sub-letting rates cannot differ substantially from the rents offered for currently available space in a building. Sub-letting rents clearly have to be a bit lower, with sub-letting being a more complex and less flexible solution for a user than direct leasing. But when we learn of offers which quote amounts 30-50