Commercial realty's reboot during Covid

An article from "The Hindu" by Nidhi Adlaka

Road ahead The office leasing market is expected to recover from early 2021

Demand is set to soar for shared spaces and large business parks

Companies may have quickly adapted to the new working normal — virtual meetings, home offices and online events — but the commercial market has not been as swift to overcome Covid-linked uncertainties. Similar to other asset classes, a number of deals in the office segment have been put on hold or pushed to subsequent quarters. With corporates and MNCs working towards reshaping their office space requirements and work culture, the commercial real estate sector is in for a much-needed overhaul.

After March, there was widespread anticipation that office space demand will see a major decline, but current trends suggest otherwise, says Santhosh Kumar, Vice-Chairman, Anarock Property Consultants. Kumar is seeing a gradual pick-up in demand momentum in key cities. “All stakeholders, including developers, were quick to adjust to new realities and changed their business strategies. Some MNCs are now on an office leasing spree,” he says.

With leasing and construction activity coming to a standstill in the first few months of the lockdown, research by Savills India reveals that total leasing declined by almost 60% in H12020 across six major cities to 13mn sq. ft (as compared to the year-ago period). “With businesses gradually opening up over the last one month, we expect that fresh supply and leasing activities will improve in the second half of the year,” says Anup Vasanth, Managing Director.

Tracking progress
Before COVID-19, the average rental yield of commercial properties was 6-10%. However, with the demand for commercial properties sliding, there is a marginal dip in commercial rental yields, finds an Anarock report.

With many companies opting for work-from-home (WFH), office space tenants are able to bargain with their landlords, says Kumar. He, however, predicts that the demand slowdown and low rentals might last only for a short period of time.

Sanjay Dutt, Chairman, FICCI Real Estate Committee, says that India’s office market has shown nearly 98-99% rent collection. With relevant micro market vacancies being low and even some marginal rental growth, he thinks its sustainability is demonstrated. This can be attributed to the fact that office space is linked to global consumption complemented by cost arbitrage, talent pool, scale, competitiveness, and geopolitical advantage, he said in the recent Knight Frank-FICCI-NAREDCO Real Estate Sentiment Index Survey.

Despite the temporary halt in construction activities for a significant portion of Q2 2020, the first quarter witnessed an increase in additional office stock compared to the first half of 2019 — growing to 3.5mn sq. ft from 2.8mn sq. ft. “This can be attributed to some earlier plans for the phased launch of quality office spaces by developers preparing to meet the expected demand from MNCs,” says Vasanth.

Most of these buildings came into the market before the pandemic and some still await completion certificates.

Chennai’s market
Chennai closed 2019 with an absorption of 6mn sq.ft. In the January-June period last year, the city had absorbed 2.5mn sq.ft and H1 2020 is not far behind at 2mn sq.ft. A large chunk of this, however, is from prior commitments, says Juggy Marwaha, CEO, Commercial, Prestige Group.

Till date, Chennai’s absorption has been 2.8mn sq.ft and factors that have driven demand include the rush towards SEZs due to the Sunset Clause (which came into effect on April 1).

As Marwaha explains, a certain level of disruption has been caused with many mid-sized and start-up companies giving up space, largely in the CBD area, and larger clients leaving in the suburban and peripheral micro-markets across various asset grades.

Slightly above 1mn sq.ft. of office space has been exited across micro-markets and Grade A, B, and C assets. The vacancy still stands below double digits. With Chennai easing lockdown restrictions, market sentiments and demand is expected to become robust in the next few months in places such as OMR, Mount-Poonamallee and CBD.

Cost saving debate
Over the next few months, there will be pressure on companies to cut costs and the WFH element is likely to impact new leasing in the short term. However, the office leasing market is expected to recover from early 2021, according to Savills India report.

The pandemic has opened conversations around contractual obligations, lock-in periods, exit notices, and force majeure clauses among other things, from both a developer and occupier perspective.

In the short to medium term of 6-12 months, there will be good quality stock available to occupiers, and the market may thus lean towards being tenant favourable.

There is a question about how much WFH might have impacted rentals or cost-cutting for companies. Market studies show that even with 50% WFH, cost savings for large occupiers are minimal — just about 1% of their operating income, says Aditya Virwani, CEO, Embassy Group.

He quotes surveys that have demonstrated “that more than 90% employees miss the office work environment given lack of social interaction, IT issues, low motivation levels etc”. Several large occupiers are exploring strategies to bring employees back to the office, says Virwani. “We do not foresee any major reduction in the office footprint of bluechip companies.”

New trends
Another trend that’s picking up pace is co-working. “The demand for flexible office spaces is increasing and will continue to drive demand over the next quarters. This is largely because there is a possibility that start-ups and other businesses that occupied expensive spaces may want to move out,” says Kumar of Anarock.

In addition, companies need to get used to social distancing norms at the workplace. “They will have to de-densify their office spaces. From 80 sq.ft. per employee, the space allocated is being increased to 120-130 sq. ft. per person,” he says.

IT/ITES companies that prefer quality spaces from prominent developers continue to seek out large tech parks. “Tech parks offer facilities like thermal scanning of employees, periodic disinfection of buildings, visitor tracking, etc., which companies would otherwise need to take care of independently in standalone buildings,” explains Virwani.

The business park concept is gaining prominence in Chennai, he says. “The city has primarily seen a concentration of Grade B buildings at the city centre. However, with time, the Chennai market has become open to modern Grade A spaces in business parks. With increasing health concerns, companies are now more concerned about employee safety.”