From our vantage point we see owners of real estate tending to fall into one of two categories. Many landlords are facing a challenging financial position caused by top-of-market purchases of office properties that were highly leveraged, especially for those properties that risked having a substantial number of leases coming due in the near term.

Falling rental rates and a slow down in office leasing activity in the market place will put additional pressure on near-term cash flow expectations. Many of these properties will face default and be returned to the lenders, a big concern for sublessors and sublessees alike.

In contrast, those landlords that have purchased their properties prior to 2005, did not refinance at unsustainable terms, and/or have a well leased building with healthy tenants, will be able to weather the storm quite well. This group of landlords will be able to retain their existing office tenants and attract new tenants because they offer a greater degree of financial stability.

Although market activity continues to slow dramatically, tenants subletting their office space still have a realistic chance to re-lease their space in a reasonable timeframe, but at greatly discounted rates. Many firms are extremely uncertain about their future business plans, which is not conducive to long-term occupancy planning. Therefore, many tenants in this group rely on short-term office lease commitments until their future path becomes clearer.

On the other hand, numerous tenants will need to take some action as they near the end of their leases. This group however is tending to wait as long as possible to achieve the very best transaction.

Both of these situations frequently translate into procrastination, short-term lease transactions and an above average number of office lease renewals. When a tenant decides they must move out of their building, the advantage of pre-built space at very attractive rates found in the sublease market, is a strong economic advantage.

Peter Shakalis is a Director at
FirstService Williams Real Estate
pshakalis@fswre.com