Considerations When Subleasing Office Space in Washington, DC

October 12, 2016

Anna Shaffer

Market Expert Assistant Director, Savills Studley DC/MD/VA Licensed Real Estate Broker

Call 202-540-5515

Where did all this Sublease space come from…and is it right for me?

One of the most common requests we receive at TechOfficeSpaces.com is to identify sublease opportunities in the marketplace. This is not surprising given that subleases typically come built-out and at a discount relative to direct space. When flexibility and capital are so important to a technology company or start-up, signing a long-term lease directly with a building owner can be an unsettling idea.

Identifying the right sublease space for a forward-thinking creative company can be a tricky task. While there is no denying there is a surplus of sublease space on the market, much of that space has been left behind by tenants in more traditional industries, such as law firms, government contractors, NGO’s and the government itself.

These types of spaces run the gamut on style.  As you can imagine, law firm space typically includes large private offices, board rooms, and deep interior areas for libraries and support staff.  Non-profits and Trade Associations, on the other hand, tend to have a healthy mix of offices and workstations, but can be conservative in their build-out which is often reflected in the quality of their space. As a result, much of the 1.5 Million+ square feet of sublease space on the market in downtown DC is attractive on paper, but may not conform to the occupancy trends we are seeing amongst TAMI tenants.

The occupancy trends we are seeing with creative/tech users of space are well documented, but include open, collaborative space that exudes stimulation and collaboration.  Flexibility and choice within the workplace are becoming more vital, resulting in shared work areas, break-out team rooms, and phone booths for private calls or quiet space.  We are also seeing kitchens take a more prominent role, often doubling as work areas with white boards and bar tops that invite co-workers to brainstorm over meals.

This type of demand for creative office space Washington, DC has really only gained momentum in the last 2-5 years. Before then, tenants and landlords were rarely pushing the boundaries on imaginative space, other than perhaps different variations of glass frosting and benching workstations. So now that we are amongst the first wave of tenants looking for out-of-the-box space, it may take some time for this space to come back to the market via subleasing, whether because a tenant outgrows the space or goes bust-o.

When that perfect sublease space does come available on the market, here are some factors one should consider to determine if subleasing is the best option:

As a subtenant, some Advantages to a sublease can include:

  • Discounted rents: Subleasing rents vary, but often range between 15% – 25% less than direct lease rents. This is because there are less up-front concessions with subleases. Sublandlord’s can’t compete with the free rent and improvement dollars that institutional owners give out as part of a lease negotiation, so they make up the difference by discounting the rent. Furthermore, the average time on market for sublease space in Washington, DC over is over 11 months, so subleases that are priced aggressively tend to get leased quicker.
  • Shorter and flexible sublease terms: Subtenants often get the added flexibility of a shorter remaining lease term than they would have if executing a Direct lease with the Prime Landlord.
  • Less stringent securitization: A prime tenant may not be as strict on a subtenant’s financials and credit requirements as an institutional landlord might be, which can help a young company with minimal financial history and/or limited resources.
  • “Plug & Play”: Sublease space is often built out, furnished, and in some cases comes with phones and A/V equipment already in place.  This is a huge cost-saver to the subtenant.

Some Disadvantages could include:

  • “As-Is” Space: Sublandlords are rarely motivated to put significant investments into the space in order to minimize expenses, so subtenants have to largely make do with the existing condition.
  • Restricted term: A short term can be the beauty of a sublease, however if at the end of a sublease, the subtenant wants to stay in their space, they will need to renegotiate a direct lease with the prime landlord at a market rent, which is often higher than what they are paying as a subtenant. If that market rent exceeds what they are able to pay, the subtenant will invariably need to move out and find other space.
  • Risk & Limited Rights: The terms of a sublease agreement are only as good as the lease that it is subordinate to. As a subtenant, you do not have a direct relationship with the landlord, so if the sublandlord defaults on their obligation, the sublease can be in jeopardy. In almost all cases, Expansion Options, Renewal Rights, Termination Options, etc. are exclusive to the original tenant and not transferable to a subtenant.

If flexibility is what you are looking for, and finding a “Plug & Play” space is a plus, then subleasing may be the best choice for you.  At TechOfficeSpaces.com we work diligently to uncover these opportunities for the growing number of creative users that are looking for space that aligns with their culture.  If you think a sublease may be right for you, please send us a note here, and we are happy to tell you more!

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