Like face masks, hand sanitiser and working from home, subleasing has become part of our ‘new normal’. Latest research shows an increase of more than 30 per cent nationally in the past three months to a new peak of just over 350,000sqm, or two per cent of total office stock. Increasing tenant uncertainty in the wake of economic turmoil is the driver, and although office markets are slowly on the improve, sublease space is forecast to become even more popular in coming months.

“The landscape of Australia’s office market has changed significantly in 2020 as occupiers shed space that was earmarked for growth,” said CBRE’s Head of Office Leasing for Pacific, Mark Curtain.

Prime grade office stock has borne the brunt of the upswing in subleasing and now accounts for 80 per cent of the market. The reason why is largely contraction – occupiers simply downsizing their footprint in the office, a choice taken in two thirds of the latest wave of sublet premises.  

What does it mean for landlords? Primarily that they should be prepared to offer as much flexibility with their leases as possible, said CBRE’s head of office occupier research Joyce Tiong. “Continued cost-cutting by businesses and persistent economic headwinds will result in occupiers seeking greater lease flexibility to accommodate a ‘flex-up’ or ‘flex down’ workforce as well as catering to employee expectations for a ‘more than a workspace’ environment,” Ms Tiong said. As sublease volumes continue rising so will an influx of “attractive tenancy options in the market including both short-term and longer-term opportunities for quality fitted space in major office locations”.

What about tenants? According to Kristan Conlon from McCullough Robertson lawyers, tenants “take a significant risk when they sublease their premises”. “This is because they remain liable for all their obligations to the landlord under the headlease including payment of rent,” Ms Conlon said. “In the COVID-19 context this risk is magnified due the increased possibility of business failure for both the tenant and subtenant.”

Complicating the issue is the challenge subleasing poses for the practical application of tenancy legislation as – problematically – the legislation does not explicitly refer to subleases. It has instead been interpreted to apply to them. “This means issues can arise where rent relief has been granted to the subtenant where the subtenant is eligible for rent relief but the tenant under the headlease remain liable to the head landlord for full rent because they do not qualify for the application of the legislation,” Ms Conlon said. 

Headlease tenants need also be aware that the price per square meter of subleases is likely to be lower due to the amount of stock now flooding the market, along with the fact that those tenants after a subleased premises are doing so to reduce expenses due to being under financial pressure themselves.

Head problems off at the pass

Avoiding complications means making the effort to dive into detail: check what your lease says in relation to subleasing and talk to the landlord as soon as possible. Look at whether subleasing is the best course of action, as opposed to an assignment, or partial surrender, always investigate a potential subtenant’s financial capability, and check any extra costs. Subtenants must ensure that the landlord’s consent is obtained in the first place while landlords entering this territory should expedite the process promptly, ensure their tenant remains liable under the lease. They should also ensure consistency between the lease and sublease. Legal advice is highly recommended.

How has the subleasing boom hit your city?

Sydney: Sublease volume has hit its highest level here since 1992, according to CBRE’s September 2020 Sublease Barometer report. In the last three months alone, Sydney has seen a whopping 56 per cent increase to reach 164,950sqm. In September 2019, the last time a significant rise in subleasing was forecast, Knight Frank estimated about 70,000 square metres of Sydney CBD space was being actively marketed for subletting as corporations reviewed their space needs due to a spate of merger and acquisition activity.

The financial and insurance services have been the biggest contributors of the current space for sublease (38 per cent) followed by professional, scientific and technical services, and then rental, hiring and real estate services.

Melbourne:  The southern capital is tracking just below Sydney with a 46 per cent increase in sublease space over the same period to 93,257sqm. This figure is a new 7-year high for Melbourne’s office market which is facing even more pressure over the coming 12 months when it will experience the greatest increase in new space in almost 30 years.

 Brisbane:  Queensland’s capital city can thank the embattled Virgin Australia for helping created a 6 per cent drop in its subleased office space to 44,600sqm over the third quarter. Virgin Australia committed to lease 8300sqm in Brisbane, CBRE reports. Of the sublease space that does exist, most is located in A-grade property, in line with the country’s other major office markets.

Perth: Just a 2.2 per cent increase in subleasing, a figure that reflects the resilience of the West Australian capital city’s office market.

Adelaide:  Adelaide’s 117 per cent increase in subleased space is deceiving as, although the biggest of all capital cities, the total sublease volume still only makes up about 13,000qsm.