Shadow Space in Commercial Real Estate

Shadow Space in Commercial Leasing

In commercial real estate, shadow space is any space that is being leased, but that a tenant is not currently utilizing. Generally, shadow space is most common in the office and industrial property market, but occurs for retail properties as well. In many cases, this is a result of company downsizing, but in other cases, a tenant may hold shadow space to prepare for future growth. Shadow space is not officially tracked, but a large amount of shadow space in a particular market is usually a sign that supply significantly exceeds demand.

Why Shadow Space Becomes Prevalent in Poor Economic Conditions

In most cases, companies which have undergone a workforce reduction hold onto shadow space because they either believe that their company may expand again in the future, or they simply cannot get out the lease. In a lot of situations, companies may not be able to sublet parts of their office due to physical issues, such as the difficulty of segregating or walling off space, or, due to leasing contracts that prevent them from subleasing. Even if a tenant can physically and legally sublease part of their office or industrial space, if there is not much time left on their lease (i.e. 1-2 years), it may can be difficult to find a tenant willing to move into part of the premises for such a short time period, since they generally will have to move again after the lease period ends.

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