Won’t You Be My Neighbor?

If their own employees won’t come back to the office, then maybe someone else’s will. 

Instead of letting their office space stay vacant, a small but growing number of companies are subletting multiple floors. Some smaller companies are even subletting on the same floor, deploying a WeWork-like model to cut costs—dividing up desks, cubicles, and offices. According to a recent report, more than 250 million square feet of office space are currently available to sublet, with subleases increasing 19% in this year’s first quarter. In Chicago alone, office space available for sublease is up by four million square feet since the pandemic, to 7.3 million from 3.3 million. “It’s happening everywhere,” says Robert Mayes, leader of the US Real Estate practice at Korn Ferry. Other major cities with at least 5 million square feet of office space available for sublease include New York, Washington, D.C., Boston, Philadelphia, Denver, Seattle, Atlanta, Houston, and Dallas, among others. 

In an era of remote work and a tough economy, the reasons for such steps are obvious. Companies can save jobs if they reduce monthly expenses like rent. But experts say the practice doesn’t come without a cost, starting with giving employees a gloomy message about their firm’s future. “Employees may worry about the company shrinking as they see real estate being given up,” says Maria Amato, a Korn Ferry senior client partner. She notes that companies often don’t communicate the rationale behind subleasing space to employees, or even the decision to do so in the first place.

Subleasing can also be a blow to corporate cultures that leaders have been trying to foster since the pandemic, says Ron Porter, senior client partner in the Chief Human Resources Officers practice at Korn Ferry. The advantage of sharing space, especially in a hybrid work environment, is that people can find community and develop relationships again, he says. That’s hard to do if other companies are involved. “It wears down the connective tissue at their own companies and makes it much easier to leave,” Porter says.

Porter also worries that in this time of pay transparency and equity, it’s not impossible to imagine two people—from different firms but in the same position; administrative assistants, say, or engineers—getting into a conversation about compensation or benefits. “Leaders could end up facing more questions about pay or bonuses or benefits than they want to,” he says. Similarly, experts say subleasing heightens the risk of proprietary information or intellectual property inadvertently being disclosed or even stolen.

To try to mitigate all this, experts say companies can create separate or private space by erecting walls and redesigning floor plans. They could move sensitive projects or material to a secure area. Some experts believe that subletting could boost morale and maybe even encourage employees to return to the office. “A full office is better for morale than a half empty one,” says Dan Kaplan, a senior client partner in the Chief Human Resources Officers practice at Korn Ferry. 

Either way, subletting is likely to be around for a while. The triple hit of inflation, interest rates, and less access to credit (a result of the recent regional banking crisis) has made refinancing commercial real estate loans more costly. In this climate, landlords are less willing to renegotiate lease terms with companies than they were over the last two years, says Anthony LoPinto, global sector leader for real estate at Korn Ferry. “Landlords are more oriented towards enforcing lease obligations, and in general they will not accommodate tenant-occupancy issues,” he says. As he sees it, the WeWork model may only spread. “Subleasing could evolve into that down the line,” he says. “It makes a lot of sense.”

Learn more about Korn Ferry’s Real Estate capabilities. 

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