Flexible office space industry to witness large-scale churn

By: |
February 17, 2021 5:10 AM

JLL India, in a report in November 2020, had said the Indian flex space market was in the midst of a strong growth cycle until it started facing headwinds due to the Covid-19 pandemic. The supply boom resulted in a significant rise in total stock - from 9.9 million sqft (MSF) in 2017 to 29.5 MSF by September 2020.

Puri expects a hybrid model under which employees would attend office three-four days a week.

While the flexible office space (flex space) industry may see demand for co-working and managed workspaces rise in the current calendar year with companies focusing on a mix of work-from-home and work-near-home; some may face tough times as overall leasing activity may be subdued.

Analysts are of the view that the current over 400-player strong industry will lose more than half its weight in next 12-18 months.

JLL India, in a report in November 2020, had said the Indian flex space market was in the midst of a strong growth cycle until it started facing headwinds due to the Covid-19 pandemic. The supply boom resulted in a significant rise in total stock – from 9.9 million sqft (MSF) in 2017 to 29.5 MSF by September 2020.

“Importantly, the current flex market penetration in India stands at 3%. It lags behind the more mature markets in EMEA and America, where market penetration of flex spaces in the office market is around the 5% mark. This provides indications of the inherent growth potential of the flex office market in India,” it noted.

Managed offices model is generally preferred by large and mid-sized corporates who want enterprise solutions, but with flexibility. Co-working model is famous with start-ups who are largely looking at flexibility.

Real estate industry veteran and former CEO of JLL India Ramesh Nair sums up the rise in demand for flex space to three trends. “One is that corporates do not want to spend too much on capex. Second, they want more flexibility in their leases and third is they want to give more choices to employees,” he added.

In short term the biggest challenge is financial stability, which is being impacted by lower occupancy rates, more lease terminations and demand reduction, Nair pointed out, adding, “Co-working will see massive consolidation. Industry has over 400 players and it will consolidate amongst about 20. There is not enough room for everyone.”

Anarock Property Consultants chairman, Anuj Puri said, “We thought that there would be a lot of consolidation when Covid hit, but it has not taken place. Certainly there will be people who will go out of business, but they are essentially those flex spaces that are so bad that nobody wants to consolidate them. Those will get shut rather than anybody buying them.”

Workspace solutions platform Awfis founder & CEO Amit Ramani agreed that industry would go through a churn. He said the pure co-working model, where players are dependent on start-ups and SMEs to come and lease space, would be the hardest hit.

“Now this model is where the majority of those 300-400 players exist. They are hit the hardest as they did not have a lot of capital. Their contracts were short term and size was like 50 seats. They faced a lot of challenges and a majority of them would not come back. I don’t know the number, but half or more will go for sure,” he added.

Puri expects a hybrid model under which employees would attend office three-four days a week.

“For instance, when I look at my own firm of 2,000 people, many from HR, finance, legal, marketing, etc only come two-three days a week, yet productivity has been outstanding. We are 30-40% occupied right now, but our revenues are over 100% of pre-Covid, which means work is going on,” he added.

Going ahead, majority of leasing (75-80%) activity will be with developers leasing office space to corporates, while the balance 20-25% will be flex space operators, of which 25-30% will be managed offices, while the remaining will be co-working, he added.

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