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SUBLEASING UPSWING

As acquisitions and consolidations heat up, corporate tenants with excess space are becoming landlords.

Nortel Networks in Sunrise is about to join a growing breed of new landlords in South Florida.

The telecommunications company has 45,000 square feet of excess space at the Corporate Centre at Sawgrass II, after a restructuring that shifted space needs to other regional offices.

So Nortel, now a tenant of the pension fund adviser that owns the building, will lease its space to a company that, in turn, will become a tenant of Nortel.

By anyones standards, that is a big sublease deal in one of South Floridaâs hottest markets. But itâs not nearly as uncommon as it would have been just a few years ago.

Nortel, in fact, has had far more prospective tenants than it thought it would, given the amount of brand-new buildings coming on the market, says real estate director Manuel Gonzalez. The company is negotiating a deal now, he adds.

While the companys sublease is exceptionally large, Nortel is hardly alone in trying to find a tenant. In several areas of Miami-Dade and Broward counties, and into a portion of Palm Beach, subleasing is a strong undercurrent in todayâs office market. And, by most accounts, it's a tactic expected to become even more widespread as companies continue to acquire and consolidate, and as new dot-coms seek space.

According to statistics provided by Cushman & Wakefield of Florida Inc., Miami-Dadeâs sublease space grew by 58 percent from the first quarter of 1999 to the first quarter this year. Thatâs largely because the Airport West sub-market saw a whopping 176 percent rise in sublease space from 92,060 square feet to 254,527 square feet.

South Miami, northeast Miami-Dade, Miami Lakes and Coral Gables also saw notable increases.

In Broward, the overall sublease space rose 42 percent, driven primarily by a 150 percent jump in available space in the countys western area. But unlike Miami-Dade, whose central business district sublease space declined, the central district in Broward rose almost 25 percent. Overall, Browards sub-markets all saw sublease space increase except for the Cypress Creek area, which dropped 53 percent.

In Palm Beach County, meanwhile, subleasing dropped in all markets except the suburban area, which rose 278 percent from 7,454 square feet to 28,179 square feet.

I've seen more subleasing in the last 12 months than I've seen in years, says broker Ken Morris of Morris Southeast Group Inc. in Plantation.

Morris is brokering a 16,293-square-foot sublease at the First Union Center in downtown Fort Lauderdale, where another slot of 13,000 square feet also is available for sublet.

I think subleasing will be on the upswing, he adds.

Other brokers agree. But just what that will mean for the overall market brings much conjecture.

For broker Barry Brizel, things look rosy.

The bulk of subleases are created by expansions and mergers tenants are being forced into new buildings because existing buildings are full, says Brizel, president of Raintree Properties and Investments Inc. in Tamarac, who works the Broward and South Palm Beach markets. I look at that as a sign of economic growth.

As a result, he says, subtenants can get unusually good deals.

It used to be that you came into a sublease and paid pennies on the dollar [in the lease rate], Brizel says. That's not the case right now. Youâre paying what the existing tenants are paying. But if you pick up a lease that has been in place for two or three years, you'll get a much lower rate. I'm also finding a lot of existing tenants don't want to take furniture with [them]. So I'll have a sublease at below-market rental rate and offer [the new tenant] furniture and very often a phone system. Tenants are grabbing space at ridiculously attractive deals.

However, that has also created unusual levels of competition for space.

John Fleeman, president of Fleeman & Co. in Miami, describes a telecommunications company seeking about 4,000 square feet of sublease space in Sunrise, only to be told it was third on the list of offers.

I found it astounding, says Fleeman, who declined to reveal specifics of the deal. You rarely find a situation where someone will walk in and say ÎIâll take itâ and not negotiate the rate. We werenât there fast enough.

Craig Melby of the Melby Group in Stuart says his client, RadiSys Corp., is offering a $20,000 bonus to the broker who subleases the companies Delray Beach space by Oct. 1. The company is moving Sept. 1 from 24,300 square feet to 35,000 square feet in Boca Raton.

In downtown Miami, the law firm Kelley Drye & Warren had almost two full floors equaling about 40,000 square feet of space at the Miami Center when it decided to leave Miami.

We could have subleased that space several times if we had been willing to subdivide it, says Richard Langhorne, president of Langhorne Co. in Miami and Fort Lauderdale. Ultimately, there were so many proposals on the space that the landlord agreed to [terminate the firmâs lease] and lease the space directly.

Donald Cartwright, regional leasing director for Jones Lang LaSalle Americas Inc., says colleague Eric Siegrist has a pending lease deal on about 15,000 square feet of the remaining space.

Other South Florida brokers, though they certainly see a booming sublease market, aren't quite as optimistic.

D.K. Mink says the unusual activity could signal the beginnings of an economic slowdown.

There's a lot of movement going on, and it is more than I have seen in a long time, says Mink, president of Mink and Mink Inc. in Fort Lauderdale. She is president-elect of the South Florida chapter of the Building Owners and Managers Association.

There are new buildings coming on line now, where as six or seven months ago, the market was very tight, she says. This could be the result of mergers, consolidations, closing branch offices, cutting back on employees but they are still obligated to honor their leases.

Broker Morris, of Morris Southeast Group, believes that what the industry calls a landlordâs market will soon swing back in favor of tenants.

All the product under construction and being delivered in 2000 were investment decisions made in 98 and maybe early 99, and that was when things were looking great. Nasdaq was on the way up and the new economy was a force to be reckoned with, he says. Things were rosier and interest rates were lower.

Morris predicts even more sublease space soon will compete with new office space, particularly as the new dot-com businesses begin to lose steam.

Broker Fleeman agrees, adding that the market may be softer than many developers believe.

A concern is that developers are proceeding [with construction] based on 90 percent occupancy rates, when those rates may be overly optimistic because they donât include subleased space, he says.

At Stiles Realty Co., a subsidiary of giant developer Stiles Corp. in Fort Lauderdale, sales and leasing manager Jim Rogers sees the optimism and concern.

I have nothing left in my buildings I just did a 25,000-square-foot sublease and all of the subleases I have done in the last year have been due to expansion or acquisition, he says.

The new space coming out of the ground offers differing price points and staggered delivery times, he says.

It is not all going to happen at the same time, thank God. If it was, I would have a different comment, Rogers adds. As a developer, we are cautiously optimistic.

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Susan Salisbury contributed to this article. Web Published Thursday, May 25, 2000 Published in Daily Business Review on: Wednesday, May 24, 2000

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