Commercial realty will see lower rents, emergence of new tenants this year

Topics Real Estate  | TCS | Coronavirus

With IT majors such as Infosys, TCS going for a work from the home norm for a significant number of employees, fresh take-up of office spaces could be low, say experts.
While last year was a record year for commercial office space developers with the absorption of 60 million square feet, the present one is geared for reduced rentals, new projects being deferred, and the emergence of new office tenants.

With IT majors such as Infosys, TCS going for a work from the home norm for a significant number of employees, fresh take-up of office spaces could be low, say experts​, adding that the only exceptions may be companies that are e-commerce ​players and those who are ​dealing essential products ​and their ​supply chain​.​ In recent times, players like Amazon and other aggregators have hired thousands of additional workers on account of growth in demand. 

Cavinkare, an FMCG company, would also be leasing out its headquarters after having moved most of its workers to work-from-home mode. IBM India was reported to be cutting back exponentially on its office space but the company clarified that while some leases were coming to an end, it continually looked at how its real estate needs to be served its employees and clients.

“Rentals will correct but how much only time will tell,” said Ramesh Nair, chief executive at JLL, a property consultant.

Another consultant Cushman & Wakefield has projected that office rents will fall 5-10 per cent on lower demand for office space from corporates because of the pandemic.

“The outbreak of coronavirus disease will have a short term impact on India’s office market, with demand likely to fall 45 per cent, said Cushman And Wakefield managing director Anshul Jain in a recent webinar.

Ashok Kumar, managing director and CEO at real estate advisory Gennex Partners says "We have seen two clients terminating their lease agreements and couple of them consolidating." Most MNC's are reviewing their real estate strategy post-coronavirus as they realized safety aside,  many services can be delivered from home while time is saved and productivity is maintained, he said. 

There are other reports of large tech firms looking at downsizing office space as well.

There will also be a hit on commercial real estate due to work-from-home. "Our estimate is that 15 per cent of the workforce may be able to permanently work from home, however, that will get offset by de-densification of offices," Sahil Vora Founder, real estate services firm Sila. “2020 and 2021 will be very challenging years and absorption may be 30-40 person lower than 2019 coupled with rental yield and collection pressure."

Large office developers are not giving in. Raj Menda, chairman of  RMZ, says tenants have asked for reductions but they aren’t going to lower rates. “For (rental) deals where inspections were scheduled for March, April has not happened, such deals are now deferred,” he said.

Rents may just hold strong if demand and supply levels don’t see too much of an imbalance. “If there is a supply of 40 million square feet this year. and demand comes only for 20 million square feet, rents will crash. If developers do not build much and there is corresponding demand, rents will hold,” says Anuj Puri, chairman, Anarock Property Consultants.

The global pandemic has driven layoffs across the US with jobless claims reaching 26 million between late March and end April and will impact the subcontinent. “ As US companies constitute a large part of the Grade A-commercial property tenant profile in India, this will have a knock-on effect in the sector, as work from home, becomes the new normal,” says Samir Saran., managing partner with Sotheby’s Realty. “We see the rental growth of the last few years slow down and yields will remain constant or decline for at least the next few quarters as tenants renegotiate leases.

Saran says the rising cost of maintenance to adapt to the “new normal” will hike costs as landlords and tenants alike will have to reimagine and redesign office spaces. “This will be increasing operational costs making multiple smaller players unviable."

While commercial office space is likely to see trends shift by region there’s universal agreement that new demand will come to a halt. “There’s no point in making new buildings and blocking capital. Few specific BTS might come at lower negotiation to consolidate. New takers will have enough choice from current vacancies post Covid-19."Kumar said.

Even so, it's unlikely that companies with large employee bases will do away with corporate offices altogether.

JLL’s Nair believes that many new industry tenants such as OTT platforms, pharma, and healthcare are expected to take up space .”IT industry was not here 20 years ago and domestic in house service centres were not there 10 years ago,” he said, adding that many new industry segments will take up the place vacated by the current incumbents.

Realtor Niranjan Hiranandani agrees when he says that when Ambassador cars went off, new cars from global motor companies came in. “New showrooms of new car companies opened up in the country."

He says: "if GDP picks up, growth will come back,” adding that he is building 2 million square feet of office space in Thane and Panvel. "Its a contrarian bet.

Business Standard is now on Telegram.
For insightful reports and views on business, markets, politics and other issues, subscribe to our official Telegram channel