Covid-19 impact: Commercial real estate in dire straits with WFH

By: |
November 22, 2020 6:15 AM

Savills in a recent report said Covid has opened conversations around contractual obligations, lock-in periods, exit notices, force majeure clauses, etc, from both a developer and occupier perspective.

economic recovery, formal sector, large companies, small companies, recovery in sectorsVarious sectors are likely to see the formal portion gaining traction over the informal segment, and larger entities benefitting at the cost of the smaller players.

Not only is the commercial real estate (CRE) segment facing dampened demand, it seems there are tougher times ahead as raising funds from private equity (PE) players promises to be a big challenge.

The work from home trend has led to weakened demand for large office spaces, and rentals have also moved southward. As per Savills India, in the January-June period, leasing activity stood at 1.8 million sq ft (MSF) in Delhi NCR, an annual decline of over 70% due to Covid-19 and consequential lockdown that acted as a dampener to the strong momentum in the first half of 2019. On the supply front, only 0.3 MSF came up (93% fall Y-o-Y), taking the total stock to 118 MSF.

Savills in a recent report said Covid has opened conversations around contractual obligations, lock-in periods, exit notices, force majeure clauses, etc, from both a developer and occupier perspective. “In short to medium term of 6-12 months, there will be good quality stock available to occupiers and hence the market may lean towards being a tenant favourable market,” it added.

Elaborating on the rental scenario in NCR over the next one year, Savills India managing director (Delhi NCR), Shweta Sawhney told FE, “NCR office market is likely to see year-end absorption numbers go down by 55% over 2019 at around 4.5 MSF and hence rents are likely to be under pressure in the short to medium term.”

Most key micro-markets in NCR are likely to be tenant markets with quality supply available at competitive rates in short to medium term. The slowdown in leasing activity is attributed to delayed decision making by occupiers and lease cancellations across Gurgaon and Noida markets, she added.

“New enquiries have been slow and mainly about portfolio reassessment and consolidations. We anticipate demand to revive to pre-Covid levels over the next nine-12 months, Sawhney said.

The year 2019 was an exemplary period for Delhi NCR, which registered a robust demand of 10.9 MSF for office spaces. However, it seems that the scenario is unlikely to play out again in the next one year.

On demand outlook, Sawhney said focus for most occupiers at this point is to optimise capital and operational expenditure, given that WFH may continue for most large occupiers up to March 2021 and in some cases even June 2021.

“Corporates are now planning their space requirements keeping in mind factors such as flexibility in lease terms like expansion and contraction of a part of their take up, minimum capital investment (where landlord also invests in aspects like flooring, false ceiling, toilets, etc, which typically would have been part of the tenant’s fit-out spend), lower rental costs, lower commuting time for employees, last-mile connectivity, social distancing, etc,” she explained.

Savills anticipates increased occupier interest for co-working and managed office spaces in addition to lower ticket size traditional leases as occupiers are evaluating splitting their portfolios to have multiple satellite offices. Locations like Noida Expressway and Golf Course Extension Road are expected to see increased traction by occupiers for their expansion and relocation, given the availability of quality supply at attractive rents and improved connectivity.

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