In the last five months a new world order has emerged wherein work from home has become the norm which is unlikely to end anytime soon. What is the current scenario of commercial real estate in India? When is the market going to bounce back?
The COVID-19 pandemic has thrown several unprecedented challenges across businesses. Like any other industry, commercial real estate market has also felt the impact. Despite the current crisis exposing some of the fragility and vulnerabilities of several businesses, the interesting thing is that many are stepping up their game to evolve and adapt to maintain business continuity. Occupiers are re-evaluating their real estate portfolio, and re-engineering them – it comprises of a mix of reductions and renegotiations. We expect global corporates to work out their new strategies over the next 6 months before we see substantial action on the demand side. Offices will continue to flourish albeit with revised space-norms and often in locations that are different than the current patterns. With the current decade belonging to frontier technology like AI, ML, Data Science and Big Data Analytics, the drive for office consumption is likely to take a steep upward curve despite the emergence of work-from-home during this pandemic.
PSUs, Corporates, even mid-sized and small organisations are persuading employees to re-join work but the fear of Covid-19 is holding them back. How can an environment be created so that employees can be back-to-office without the fear of Covid-19?
There needs to be demonstrable action shown by the corporates to employees to bring back the confidence of a ‘Back To Office (BTO)’ movement. Facility teams across most firms are working on getting the offices ready to receive any employee who wishes to work from office. These changes include simplistic measures such as access control to complex changes related to air conditioning. Furthermore, changes are being worked out in restrooms and cafeterias.
What are the emerging trends in commercial real estate? Is the office layout being re-done with technology getting prominence due to pandemic?
Social distancing is here to stay. While several large corporates have already adopted agile work formats, this trend will get accelerated for practical and safety reasons. This could lead to reduction in overall space requirements for new offices. In addition, density in offices is likely to decrease. Currently, almost all firms operate with maximum density. In the short to medium term, offices will have to operate at 30 to 50% density to adhere to the social distancing guidelines. For instance, occupiers that had compressed their space density to 70-80 sft / person may be forced to reconsider the norm and increase the density to 100 sft / person in the long term. This could result in major de-clustering of large work-floors. Hygiene and employee wellbeing will have a new meaning to companies, potentially influencing the design and orientation of the office space post-COVID era. Technology is also helping occupiers during this phase where distancing is the norm. Several firms are using seat reservation tech to allow employees to come to office and find a dedicated desk for the day.
How is the rental and leasing market shaping up?
Demand has been outpacing supply in most key office markets across the country in the last few years. Vacancy rates in some of the key micro-markets in the country remained extremely low. With fresh supply likely to see a significant delay due to partial lockdowns, rentals may not see a significant dip. Savills India’s research report – India Market Watch Office – H1 2020 highlights that in the January-June 2020 period, office absorption in six major cities of Mumbai, Delhi NCR, Bangalore, Chennai, Hyderabad and Pune stood at approximately 13.7 mn sq. ft. as compared to 32 million in the corresponding months a year ago.
Which are the cities that are registering maximum footfall in office-space in this pandemic period? Why?
As per Savills India’s research report – India Market Watch Office – H1 2020, Bengaluru continues to be the front runner in office space demand with absorption of 3.3 mn sq ft, representing almost 35% of office space demand in the top 6 cities. Office leasing in Mumbai Metropolitan Region (MMR) stood at 2.8 mn sq. ft. followed by Chennai at 2.1 mn sq. ft. With lockdowns easing in a phased out manner, office-space footfall would be driven largely by what local authorities are permitting.
Will it be an end for co-working space or will it emerge stronger? Which are the sub-sectors that are expected to perform better?
Co-working spaces are likely to reorient their spaces to adjust to the new environment post-COVID-19 pandemic. Few co-working providers will look at undertaking some modifications to de-densify their spaces. Post-COVID-19, few large firms may want to setup a turnkey office solution also known as alternative ready office at their disposal just in-case the main site is not accessible for any reason. These turnkey offices can easily be established in co-working spaces with fully loaded custom IT infrastructure with zero capex investment. We think that flexible space operators will reinvent themselves and come out stronger.
What is your take on warehousing & logistic and data centres? How will they shape up in future?
Business sectors in India have suffered a severe slump owing to Covid-19 and the subsequent lockdown, however, the outlook for the manufacturing and industrial sector is brighter than for most and is seen as the new sunrise sectors. The industrial sector is set to benefit as multinationals seek to diversify their manufacturing locations. India is emerging as an alternate manufacturing investment destination for China. At this point, the world is looking at China plus one strategy for manufacturing solutions. There are over 1,000 foreign manufacturing companies that are planning to shift their manufacturing base to India from China, out of which 300 companies are actively pursuing production plans in mobiles, electronics, medical devices and textiles. This would lead to an increased demand for warehousing spaces across Tier 2 and Tier 3 cities of India. Further, existing growth potential, the government’s clear strategy, strong leadership and India’s cost advantage will continue to help in attracting sizeable foreign investment into the manufacturing sector.
Commercial real estate was the only bright spot in the stagnant real estate sector in India. Now with extensions in lockdown, commercial realty has taken a hit. How can the government step-in to propel the sector?
The commercial sector has grown and thrived due to private enterprise, and we see the recovery of that being driven in the same manner. Although the pandemic has led to a temporary blip in the growth story of India’s commercial real estate market, we expect to see recovery by next year. The inherent demand for office space in India continues to remain intact as we believe that the economic fundamentals of this country continue to be strong. Being a talent destination has worked in favour of India’s commercial office market in recent times.
How can an environment be created so that investment in commercial real estate is back to the pre-Covid-19 level?
Contrary to the global financial meltdown, the solution for the ongoing crisis lies in social and scientific intervention. Until then, businesses are left with no choice but to adjust and prepare for the new norm. While several large corporates have already adopted agile work formats, this trend will get accelerated for practical and safety reasons. This could lead to reduction in overall space requirements for new offices. Even as work from home finds more acceptance in the corporate, it will not replace the importance and need of high quality and modern workplaces which over the years has proved to be imperative for attracting and retaining talent.