Commercial real estate in India is once again on an upswing with a steep rise in leasing activities. The segment suffered demand destruction due to a home-bound work culture during 2020 and 2021. However, by the midst of the previous fiscal, demand started moving upward with economic normalcy setting in.
The demand further got a shot in the arm during the inception of the current fiscal as most of the organizations started implementing back-to-the-office, thereby giving a fillip to an otherwise subdued demand.
Demand for Grade-A Picking Up
Across major Indian cities, leasing activities are rapidly growing with demand emanating from IT, ITeS, e-commerce, FMCG, BFSI, etc. By the month of June, the total leasing amounted to 30.4 million Sq Ft in the six major Indian cities, as per a report by Savills. This is a 130% Y/Y jump when compared to the leasing during the previous fiscal. The supply lines have strengthened with around 32.4 million stock of properties, further underlining the growing strength of the Indian office sector.
However, this has also resulted in higher costs of operations for Indian occupiers, which is not a very healthy sign at a time when most enterprises are recovering and trying to make up for the loss incurred beforehand.
Cost overrun remains a bottleneck
It is noteworthy that owning a top-quality grade-A office stock in the CBDs (or other prominent commercial catchments) comes up with tremendous benefits. It helps business owners to network better, find clients, and get access to top-quality human resources. Likewise, it can also contribute towards corporate identity and brand building.
Nevertheless, the cost of good quality spaces is soaring in most parts of India. In tandem, leasing rates are also accelerating. As per the Savills report, the average rental has moved up by 7%, which is further weighing on the financial health of the organizations. There are also hidden costs associated with office leasing such as stamp duty, and registration fees.
Moreover, mostly while leasing an office, an occupier rents out a space larger than its current need keeping in mind possible expansion. This, however, can result in cost overrun, if not utilized in the future.
Co-working space can be a feasible solution
One of the viable solutions to contain the cost would be to pivot to shared and co-working spaces. Shared spaces and co-working in the current market scenario are now moving from the periphery to the core. Close to 20% of the leasing these days consist of co-working spaces.
Once mostly restricted to smaller companies, start-ups, and freelancers, now MNCs, large businesses, family offices, etc. are also opting for shared spaces. In fact, around half of the leasing in the segment is coming from MNCs.
There are immense benefits associated with leasing out a shared space as it offers flexibility to operate alongside containing cost. It enhances overall productivity and offers individual businesses to network seamlessly.
The biggest advantage is to scale up easily. One can lease out seats in a co-working space as per the needs and going forward can take more if required. This can contain additional costs and enable corporate to own office spaces in prime locations without incurring a high cost.
Post lockdown many corporates are adopting a hub and spoke model, wherein a central office is augmented with a network of few other offices. Such an arrangement saves the employees to commute to the main office. Rather they can visit the nearest office. In such an evolving configuration as well, shared office spaces fit in, as rather than leasing out a fully functional office, occupiers can lease out seats as per their needs, across the city in co-working properties.
(By Nakul Mathur, MD, Avanta India)