Business Centres Beware: Competition from Sub-Lets is Rising

New York City
New York City

Business centres and flexible workspace operators are part of a growing market, which is readily inviting more and more competition. Just recently, we reported on the growth of storage suppliers moving into our industry, not to mention the ever-increasing number of hotels as alternative workspace operators.

There is also a lot of churn within our sector, what with new operators springing up and a number of consolidations, such as the merger between Regus and MWB and most recently, Serviced Office Group’s acquisition of Avanta.

Now, a new form of alternative workspace is rising – and it could prove to be a key competitor for business centres.

Sub-letting, whereby companies that lease office space then rent out a portion of space to a third party, is on the rise. Of course sub-letting is nothing new, but what’s interesting is that tenants are getting creative with their sub-let marketing, and they’re pushing it out as a form of flexible workspace to small businesses and entrepreneurs.

The scoop from the New York Times is that some sub-letting cases resemble a “Russian doll”, with several layers of leasing.

For instance, in SoHo’s 568 Broadway in New York, a publisher is sub-letting two floors of office space to social media company Foursquare. In turn, Foursquare is sub-letting a portion of this space to a collection of technology firms. One of these tech firms is leasing their space out as coworking, thus charging drop-in businesspeople on a per-workstation basis.

We’ve been watching the rise of coworking for some time. If this trend catches on, it could be much easier for potential coworking suppliers to find space in key markets such as New York City, where space is at a premium. Just think how many businesses pay premium rates for more office space than they need in city centre locations. The prospect of sub-leasing space to other firms – including coworking suppliers – could be an attractive one.

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Look at the stats. According to the report, sub-lets in New York’s Midtown area “accounted for 19 percent of major leasing activity this year, up from 11 percent in 2010”. The report continues: “Between January and April of this year, 33 percent of all the leases signed in Manhattan by tech companies… were sublets.”

In other words, business centre operators need to watch out for increasingly flexible sub-let agreements, which could attract traditional clients and also coworkers away from their space.

According to the New York Times, this threat is real – and it’s happening: “In the last few months, the area of Manhattan south of Midtown has been awash in deals where early-stage tech companies have opted to take over office space belonging to another tenant, rather than enter into a direct lease with a landlord.”

The report claims that sub-let deals are often affordable, and go in for the same flexible, short-term agreements as classic business centre and serviced office deals. What’s more, many sub-let spaces come fitted-out and ready to go.

That’s not to say sub-letting is without its risks, and this is where business centre operators have a real advantage. A sub-letting scheme can quickly fall down like a house of cards should one of the businesses go bankrupt. Business centres should point out to clients that they have certain assurances in place, which protects against any nasty surprises.

We’re watching the sub-let trend with interest. Flexible workspace is on the rise, and with it comes heightened competition from various corners of the wider commercial property market. This trend could already be affecting your workspace, so it’s certainly one worth watching.

Image source: vitasamb2001

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