Real estate values have achieved some of their highest levels in years, for both housing and commercial properties. Yet, news reports advertise dangerously high vacancies in office space markets nationwide. How can these two contradictory events coexist? They have occurred as a result of disparate events, both of which stem from the same origin.

Event 1

Investors decline to buy stocks. So, what they have been buying? Looking for cash flow and relatively stable and secure investments, large investors, especially those from outside of the U.S., have been buying up real estate at a fast pace. Add to this the availability of cash and tremendously low interest rates. The result has been an increase in real estate prices over the last two years.

Event 2

Corporate occupants have been cutting staff, postponing expansion plans, and giving up excess space in large quantities for the last two years. Most of this excess space continues to be offered for sublet. As little demand exists for growth space in national office markets, much of this sublet space continues to languish, causing a continued drain on the very corporations that have looked to cut their expenses by disposing of it. Landlords, however, seem unaffected by the dearth of available space. Why? Because most of this excess space is still under rent and financially viable, its occupants still compelled to pay rent until they find companies to take it off their hands.

Many real estate professionals are asking themselves what will happen to this space over time. The answers are clear yet, potentially hazardous. In most cases, corporate tenants offering sublet space remain apt for continued rental payments, even after they secure a subtenant. So, it seems that landlords, in many cases, feel safe while they continue to collect rents for the next few years. However, some companies offering sublet space may enter insolvency, causing landlords to lose future rental income. Furthermore, danger exists for landlords as a great portion of those leases offered for sublet will expire over the next three years. Landlords will then be faced with real vacancies, and less cash flow.

What could happen?

Economists predict the stock market may bounce back over a one to two year period beginning, in earnest, some time in the next twelve month, and right around the time quantities of sublease vacancies will become real vacancies, and begin to negatively impact landlord’s cash flows. Such an increase in vacancies and a corresponding turn down in cash flow could have a downward effect on office property values. Couple this with a possible move by investors from real estate back into stocks and other investments, and real estate values could drop even further. The hoped-for silver coating to this story is that as the economy picks up steam again, fueling business growth, more jobs will be filled, and so a lot of that available real estate.

How do we protect ourselves?

If your company leases space in a building where important subleases are available, it may be careful to consider restructuring your lease to take advantage of this down cycle. Restructuring could steady your building financially thereby, keeping your landlord in business, and avoiding possible business interruptions for your company. This is important so that your landlord continues to provide your company with quality services. On the other hand, it may be careful to wait-out the coming market and economic changes, and make your selection at a later date. Entity circumstances and the needs of your company will vary, and should really impact your decision.