Commercial realty picks up but challenges remain amid Covid-19 pandemic

Companies are still working out their space needs post-pandemic before committing to rents and leases

While office property developers breathed a sigh of relief at the end of last year when they saw leasing improve, the coming quarters might not be so rosy.

Though office demand was lower by around 29 per cent on a yearly basis in 2020, on a sequential basis, it was up 16 per cent in H2 2020. 

“Many occupants are shedding the ‘wait-and-act’ mode and that is reflected in some large-sized space requirements coming into the market. With the wider vaccine roll-out, it is expected that, as occupiers plan to return to the workplace, they will in tandem firm up their portfolio strategies,” said Badal Yagnik, managing director, tenant representation at Cushman & Wakefield. For instance, Accenture leased 800,000 sq ft in Startech Park, a joint venture between RMZ and Prestige Estates in Bengaluru. Global chip maker Intel took 250,000 sq ft in RMZ Ecospace in Bengaluru last year.

“The traction has moved up for clients looking at space. However, it is primarily towards consolidations and expansions for the year 2022/23. We expect the demand to further increase by Q2 2021,” said Thirumal Govindraj, managing director, RMZ.

Others are somewhat more cautious. “The green shoots of demand recovery are visible but it will take about two quarters before demand revives to pre-covid levels,” warned Sriram Khattar, managing director of the rental business at DLF.

His reasoning is based on the fact that IT/ITeS companies and captives are still in the process of deciding the finer details of their post-pandemic workplace solutions — workstations, de-densification, collaborative and networking areas and so on.  

Rating firm India Ratings has gone one step ahead of Khattar and predicted challenging days ahead for office developers in FY22 and FY23.

It expects net new absorptions in FY22 and FY23 to be around 40 per cent below the average level seen in FY19 and FY20. This is likely to result in an overall increase in vacancies to 19.3 per cent by March 2023, up from 14.7 per cent in December 2020.

“Rising vacancies could result in a somewhat difficult environment to lease out new under construction office properties,” said India Ratings.

The pan-Indian vacancy rate has inched up from 14.5 per cent in Q1 2020 to 16.3 per cent by Q4 2020, according to Cushman & Wakefield.

India Ratings added that flexible working options have been prevalent in workplaces over the past 12 months and this could prove to be a long-term threat to office absorptions.

“IT and ITeS firms have started adopting innovative, flexible, and hybrid working options such as hot desking policies, reducing floor space and opting for permanent work from home,” said India Ratings.

On a brighter note, the rating firm said it has seen few instances of office lessees cancelling their leases. “As office lessees have to incur substantial upfront fit out costs while moving into new premises, they are likely to be extremely cautious before cancelling any leases,” it said.

Consequently, it does not expect mass lease cancellations over FY22.

Both developers and consultants are cautious about incremental leasing by tenants this year.

“With the gradual re-opening of the economy and resumption of sectoral momentum, incremental leasing options are largely at the discussion stage. We look forward to seeing these translate into actual transactions,” said Nirajan Hiranandani, chairman at Hiranandani Communities.

For Khattar, incremental leasing will be more challenging now compared to pre-covid times. “Developers have to put in more effort to get tenants to fill up spaces,” he said.

It’s a view Yagnik shares. “Currently, capex spends are still controlled and their strategies are revolving around flexibility and returning to work in a staggered manner. Incremental leasing across all cross sections of occupiers is not evident yet,” he said.  

Due to lower demand, developers and consultants expect subdued rental growth this year. “We will not be able to increase this year. But with demand coming back, we will be able to increase rents next year,” said Khattar.

The only exception to this rule might be very high-end buildings. “Rental increase may not happen for 2021 barring a few Grade A buildings where vacancy is less than 5 per cent,” said Karan Singh Sodi, regional managing director, Mumbai, at JLL India.