Shadow space in commercial real estate 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.

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.

The benefits of shadow space in commercial real estate are that it can provide a tenant with the flexibility to prepare for future growth, or to hold onto space in case their company expands again in the future. Additionally, if a tenant cannot get out of their lease, shadow space can provide them with the ability to still use the space, even if they have downsized.

The risks associated with shadow space in commercial real estate include difficulty in subleasing the space, difficulty in finding a tenant willing to move into part of the premises for a short time period, and difficulty in segregating or walling off space due to physical issues. Additionally, a large amount of shadow space in a particular market is usually a sign that supply significantly exceeds demand, which can lead to a decrease in rental rates and a decrease in property values.

Investors can maximize the potential of shadow space in commercial real estate by subleasing the space to other tenants. This can be done by advertising the space to potential tenants, negotiating a sublease agreement, and ensuring that the space is physically and legally able to be subleased. Additionally, investors can look for tenants who are willing to move into the space for a short-term lease, such as 1-2 years, as this can be beneficial for both parties.

In order to finance the acquisition of shadow space, investors can look into loan products such as bridge loans, hard money loans, and mezzanine loans. Bridge loans are short-term loans that are typically used to finance the purchase of a property until a more permanent financing option can be secured. Hard money loans are short-term loans that are backed by the value of the property, and mezzanine loans are a type of loan that is secured by a second lien on the property.

The most common uses of shadow space in commercial real estate are generally a result of company downsizing, or to prepare for future growth. In many cases, 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.

The best strategies for leasing shadow space in commercial real estate depend on the particular situation. Generally, if there is a significant amount of time left on the lease, the tenant should try to sublease the space. This can be done by advertising the space online, in newspapers, or through a real estate broker. If the tenant is unable to sublease the space, they may be able to negotiate a rent reduction with the landlord. Additionally, the tenant may be able to negotiate a rent abatement or a rent deferral with the landlord. Finally, the tenant may be able to negotiate a buyout of the lease with the landlord.

For more information, please see the following sources:

• Leasing Shadow Space
• Negotiating a Rent Reduction
• Negotiating a Rent Abatement
• Negotiating a Rent Deferral
• Negotiating a Buyout of the Lease