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Stacey Tyler: Which explains why we're seeing so much subleasing.

Daniel Suckerman: Bingo. Right. So the flexibility workers working from home and then just the way, because of that, the smart structuring of office space with hoteling and stuff like that, which I could explain more, has a glut of space on the market. What does that mean? It means if you are in fact looking for space, which you'll have to do if your lease is expiring or your business, whatever, it means that there's a glut of space that is sublease space, meaning it's existing space that's leased by a tenant. They don't need it, so then they become the sublandlord to another tenant who's the subtenant. That space competes in the market with owners of office buildings that have space unleased and available for lease. But sublease space, there's a lot of it in the market, which means supply and demand, that pricing goes down. So if you're in need of space, you have a lot of opportunity to seek a sublease space, which will be potentially desirable for you for a few reasons. One, like I said, the pricing is going to be better than a direct lease space typically.

Stephen Tanico: And why is that?

Daniel Suckerman: There's lots of reasons, but think about it like this: if somebody leased space five years ago, they bought it at a rate or leased it at a rate that was at a five-year-old rate. So they've been locked into potentially below market rate, and so their starting point when they put it on the market is going to be at a lower point than the landlord would at a current fair market value. So you're starting from a lower point. Also, the sublease market, the sublandlord is understanding it's going to be nearly impossible to get dollar for dollar back. So it's sitting there worthless to them, so they'll essentially take something to get it.

Stacey Tyler: To mitigate their loss.

Daniel Suckerman: To mitigate their loss. Good lawyers.

Stephen Tanico: Versus a landlord. I guess you effectively couldn't go to a landlord and say, "Hey, this guy's willing to sublet to me for $3 a square foot. Are you willing to match that?"

Daniel Suckerman: Right. An office building owner has a lot of different incentives. They're going to have different stakeholders. They're going to not just say, "Hey, cut the best deal you can, even if it's for six months" or whatever. That's another thing that we can talk about, flexibility that he's built in facilities. A building owner is going to have a lender on the building that's going to have certain controls over the leasing ability of the building. So that building owner as opposed to a sublandlord is a little more stuck in what they can do.

So sublease is a good option for people, especially in the market we have now with the work from home flexibility and saying the economy being not sure, where's it going to be in six months? Where is it going to be in a year? Where was it six months ago? We don't know. A sublease also gives you, besides just the pricing differential, it gives you typically more flexibility. So you can go in trying to negotiate a six-month sublease or a one year. So our one year was a one-year option, whereas if you're going direct to the building, you're not going to get that.

Stephen Tanico: And that's just one aspect of the flexibility we're talking about.

Daniel Suckerman: It's a good flexibility. So our docket right now is seemingly more heavily weighted towards subleasing. I'm talking about the office leases, office market more heavily weighted towards subleasing.

Stacey Tyler: And you mentioned hoteling. So can you talk a little bit about, for somebody who's looking for space, what are the benefits of doing hoteling versus a sublease or a direct lease?

Daniel Suckerman: Well, for hoteling, what I was describing, I think you're thinking more of a flex operator space, which we could talk about. But for hoteling, I was describing it more, think of it as like a space planning exercise. So you would need less space for your employees since not every employee is there every day.

Stacey Tyler: Oh, I see.

Daniel Suckerman: Right. It makes sense in a law firm. Every associate wouldn't need their own office. There would be a whole slew of a floor of associate offices not tied to a particular person, and you just show up in the morning and you log in and there's something that says you go to office five today, it's empty. And our office is essentially just the laptop, maybe some paper, but we can throw that in a bag. So it's that you plug into anywhere. You don't need a dedicated office set for a dedicated person if that dedicated person is only there 50% of the week. So you need less square footage for the same amount of employees. That's what I'm describing it, hoteling.

Another option like you're describing is a flex space, which the king of that world was WeWork. That was really a pre-pandemic, I don't want to say fad, but certainly it had its moment before the pandemic. Now that's less prevalent. It's still there and there's still, as there was always is in real estate, the quality is winning out there. But with the glut of space on the market and the availability of subleasing, again, back to supply and demand, the pricing is approximating in that flex deal with a WeWork or a similar provider. So that might not be as desirable if you can get a similar deal on a sublease and have a little more control over your space.

Stacey Tyler: Right. So I think we're all seeing that real tension in the office space due to all this post-pandemic stuff. But how are you seeing that post-pandemic world affecting other asset classes like industrial?

Daniel Suckerman: So that's staying a little more strong. Industrial is certainly staying a little more strong. In our northeast market, we see a lot of life sciences, lab, especially in Jersey, that's very prevalent. Industrial I think also has cooled down a little bit. All of the real estate market is tied to the capital markets more broadly. So as interest rates heat up, everything takes a breather and sees where things are going. So there's been a bit of uncertainty in the market for a long time, if it's going to get better, if it's going to get worse, if it's going to stay the same. So I might be talking in this circular way here, but industrial during the heart of the pandemic got very, very hot. There was a lot of need for expansion of Amazon and similar last mile, getting tons of stuff to people in lots of different places. So all those sort of retailers bulked up like crazy and businesses that support that. That has maybe gotten saturated. So it's still better than the office market, but it feels like it's come to some sort of equilibrium.

Stacey Tyler: Right. Yeah, we have been seeing a lot more lab and specialized spaces rather than-

Daniel Suckerman: The lab stuff, especially where we're sitting right now, is a very hot area that New Jersey in particular does a really good job of catering to. The market does a really nice job of catering to that type of user, both the office too. Off pharma companies have their headquarters in Jersey, but then also there's some specialized lab space that you see. Life sciences lab space, that's still very hot and very expensive, very specialized. There's not a ton of existing stock on that that's available. And if there's new builds, it's obviously very expensive to build specialized space like that with all sorts of specialized needs, as you would imagine, different from just building a cookie cutter office.

Stacey Tyler: Right. Right.

Stephen Tanico: Yeah, which leads me to think that more of our listeners probably would like to know more about subleasing office leasing than lab leasing. So to take you back to where we started, Dan, I'd love, and we don't need to get in the weeds here or give a legal answer that is not yes or no, but it's never yes or no.

Stacey Tyler: It depends.

Stephen Tanico: What are some things you would want our listeners to know when thinking about subleasing space that are points where they might have more bargaining power from the point of view of a subtenant? I know you'd already mentioned the mitigation of costs.

Daniel Suckerman: Right. So cost is one thing. The thing to remember about a sublease, one interesting thing about our job is real estate is a property interest that has special characteristics that other assets do not. So by that, how that works out in a sublease, and kick me under the table if this is getting too lawyerly, is the sublease is an interest inferior than the tenant, the sublandlord's lease. So what does that mean? It means if the tenant/sublandlord goes bankrupt, the bankruptcy will trigger a termination of their lease. That was a gross oversimplification. Eventually it'll trigger a termination of their lease. That automatically as a matter of law wipes out the sublease, it's gone. So the subtenant is there, did nothing wrong, but is wiped out.

Stephen Tanico: Interesting.

Daniel Suckerman: By the way, that's in part why it's cheaper. You're buying a different thing. You're buying a risk that doesn't exist in a direct lease with the building's owner's scenario.

Stacey Tyler: Right, and with a big risk that's out of your control completely.

Daniel Suckerman: It's a big risk that's out of your control. Absolutely. And it means you've done nothing wrong and you're out there on the street. So that is always a risk embedded in subleasing. But in the market we're in now, besides just the pricing, which is the most obvious thing that goes into market forces, also a subtenant will hire big fancy lawyers like us and they'll tell them, "Besides just getting the right price, you also have to think about these legal risks and how does the market allow for allocation of these risks differently?" So what I've been seeing recently, say over the past few months that I didn't used to see when the market was really hot, is the subtenants getting very aggressive, seeking protections against that risk that I was just talking about, about the tenant/sublandlord going under for some reason, doing something bad that impacts the sublease. And how do you mitigate against that? You get a personal guarantee of the principle of the sublet or a parent to say, "Sublandlord, if you do something bad that screws up my sublease, person will guarantee."

Stacey Tyler: Really? In favor of the subtenant?

Daniel Suckerman: Yes.

Stephen Tanico: Dang. Are you seeing the market dictate that? Because if I were the tenant, I'd say, "Go kick dirt somewhere."

Daniel Suckerman: No.

Stephen Tanico: The market's dictate? Okay.

Daniel Suckerman: Absolutely. Second, I saw the sublandlord put up a matching security deposit.

Stacey Tyler: Interesting.

Daniel Suckerman: It's kind of a screwy way to think about things. It's not really a security deposit, essentially like a deposit to backstop a form of indemnity or guarantee like I was describing. So the subtenant, and I think it's driven by the market, is saying, "I want to as much as I can," these are all imperfect, "get different tools, negotiate different contractual protections that get me closer and closer to my same risk profile I would have if I was in a direct lease with the building owner where the sublandlord doing something bad doesn't harm me."

The other things you would get, not just the other thing you want to think about besides just the sublandlord doing something bad, it's that you don't want the sublandlord to get in your way of things. So one thing a subtenant will want to be thinking about, and in the market, this is where the subtenant has more power, you want to really hold your sublandlord's feet to the fire, is prevent them from doing any deal direct with the building. For example, if that sublandlord has an extension option that they could elect after the sublease term ends to essentially step back into the space and continue, say, "Folks, business has changed," and they want to step back, you say, subtenant would say, "No, you are voiding that option." You cannot elect that option because the subtenant wants to-

Stacey Tyler: Get a direct deal.

Daniel Suckerman: ... have a direct deal. And if the sublandlord has an extension option, that's a block. And is it actually block? Here's the little secret to our listeners: what we do in lease negotiations is not thinking, "We're going to win in court one day." It's all just setting up for future negotiations and marketing power. So those kind of little contractual nuggets are, maybe you'll never need, maybe the subtenant won't ever need to work on a direct deal with the building's owner, but maybe they will, and then they'll be glad that they got their sublandlord to agree not to ever elect that option, because that would've been a block.

Stephen Tanico: Now, you mentioned the idea earlier that a risk with a sublease is the automatic termination of it in the event of the sublandlord going bankrupt. Because of that and anything else, how much does a landlord really care about a subtenant? Or as long as their rent gets paid, they don't really effectively care how it gets done?

Daniel Suckerman: Yeah, I think that's right. I think the building's owner does not care. They shouldn't. It's just a part of doing business. They understand how that is. They would rather have the tenant in the building have an income source, because that means it's more likely their overall rent's going to be paid. Typically in leases, the landlord really can't stop a sublease. The words we use is unreasonably withhold consent or whatever that means. But it really, for all intents and purposes, means they can't withhold consent unless there's something really screwy going on. So yeah, Stephen, I think you're right, the building's owner does not care that much. I haven't seen the building's owner do anything but be cooperative in this market. They've been facilitating the transactions, being cooperative, facilitating, getting information and assisting with the move in, all that stuff. It's been very cooperative and that's how it should be. That's how it should be.

Stacey Tyler: Right. The goal is to have tenants.

Daniel Suckerman: Yeah, the goal is to have a full building. This is a small industry, so everybody knows everybody. You want to just be helpful. You have no idea where this tenant's going to be with their business in five years or the CEO moves somewhere else and has a good experience in the building. So everybody's generally trying to get to the same place.

Stacey Tyler: Right. And I think one of our main takeaways that we want our listeners to have is that this is very subtle. There's a lot of nuance to a sublease and a lease in general, and we highly recommend they retain competent counsel when they notice that.

Daniel Suckerman: Yeah. No, that's very true. And some people think leasing is easy and unimportant, and with any contract, the goal, the best case scenario is you finish negotiating it and it goes in a drawer and it never comes out. That means it was a really successful negotiation, but you never know. You think about where we were in March 2020. You never know, so you want to protect yourself and think about as many crazy eventualities as possible without being a jerk in negotiation. That's not helpful either. You still need to get it done, and you want to get the deal done, but if you can do it thoughtfully and you could explain yourself, and these aren't secrets to the other side. Everybody knows where everybody's trying to get and why they want these. These are no secrets, but if you can just be honest about what you need and the other side, it's no problem for them, people work together and come up with decent deals that everybody can win.

Stacey Tyler: Well, I think that about wraps it up for our time today. Thank you so much, Dan, for being here with us today, for helping us get a little bit smarter about leasing.

Stephen Tanico: And more importantly, thank you, listeners, for tuning in today. Be sure to like, subscribe and follow wherever you are listening to this podcast.

Stacey Tyler: And if you have any questions or ideas for us, drop a comment. We'd love to hear from you. Thank you and hope you listen again soon.

Kevin Iredell: Thank you for listening to today's episode. Please subscribe to our podcast series at lowenstein.com/podcasts, or find us on iTunes, Spotify, Pandora, Google podcasts, and SoundCloud. Lowenstein Sandler podcast series is presented by Lowenstein Sandler and cannot be copied or rebroadcast without consent. The information provided is intended for a general audience. It is not legal advice or a substitute for the advice of counsel. Prior results do not guarantee a similar outcome. The content reflects the personal views and opinions of the participants. No attorney client relationship is being created by this podcast and all rights are reserved.