Non-metros to be the next growth drivers for commercial real estate

May 21, 2021 3:28 PM

The growth of the commercial real estate sector can be attributed to its strong fundamentals.

The establishment of satellite offices in non-metro cities will also drive institutional investments in data centers in these locations.

The commercial real estate sector in India is undergoing a metamorphosis of sorts. The office market particularly, which reached its peak in 2019, was significantly impacted by Covid-19 and the ensuing lockdown. In 2020 the net absorption of office spaces witnessed around a 45% drop to 25.5 million sq. ft., while new completions stood at 36.4 million sq. ft., a fall of 27%. As a result, real estate players had to rethink their strategies as consumer demands changed. Several Covid precautions had to be retrofitted to existing properties. New properties needed to quickly adapt to meet industry standards as their resilience was at stake.

With the gradual opening of the economy post the lockdown, the country’s overall office real estate market in Q3 of 2020 grew by around 64% against the second quarter of 2020. The growth of the commercial real estate sector can be attributed to its strong fundamentals. Bengaluru and Hyderabad led in the overall absorption, with Bengaluru contributing more than 30% of the country’s total office space absorption and more than 9 million sq. ft. precommitment. Much of the absorption was driven by the industrial, manufacturing, healthcare, and e-commerce sectors. The roll-out of the vaccine is expected to provide further impetus to the sectors.

What we expect to see in the coming quarters, green shoots of which are already showing, is the shift from large, consolidated work areas to a hub and spoke model that includes home offices, flexible workspace, satellite offices, and central headquarters. While work-from-home ensured business continuity during the lockdown, employers realized the scope for accomplishing work remotely was more widespread and feasible than previously thought. IT companies, which comprise about 40 percent of office lessees in India, realized that employees, mainly from non-metro cities, faced challenges of connectivity, bandwidth, and the physical impossibility of incorporating a work area at home over a long period. Organizations are now increasingly looking at tying up with co-working spaces or setting up serviced office spaces.

During this phase, we also noticed that a large portion of the employees who had moved to Tier 1 cities for employment moved back to Tier 2 and 3 locations to work-from-home. This reverse migration revealed that employees would prefer to work from Tier 2 or 3 cities if given an opportunity. Remote working also allowed organizations to tap talent from a larger pool, for example, women who had taken maternity breaks, individuals who had to take care of the elderly at home, etc. This only leads to an increase in job satisfaction and lower attrition, thereby increasing productivity. This trend will provide opportunities for prominent real estate players to expand their operations in non-metro cities.

Prominent players with experience in running high-end Grade A office spaces for information technology companies and other services companies will have the edge over other players, considering IT companies require precise building specifications such as secured high-speed data connection, plug-and-play features, etc. This will also drive the growth of co-working spaces in non-metro cities. Currently, many of the co-working spaces are focused on high-end markets, but with consumers moving back to their hometowns and small businesses trying to minimize expenses, co-working spaces have emerged as the obvious choice. As co-working spaces enter different geographical locations, developers are likely to change the price of their products and services offered to remain competitive.

Additionally, the establishment of satellite offices in non-metro cities will also drive institutional investments in data centers in these locations. These centers must provide highly robust data infrastructure, including uninterrupted and secured high-speed connections in these locations. For a market that is expected to outperform itself in the next five to six years and provide an investment opportunity of more than $5 billion by 2025, data centers in non-metro cities will play a fundamental role in its growth.

This expected growth can be credited indirectly to the pandemic, which forced businesses to change strategies and explore various new models. As change is constant, it is necessary for a company, especially in this current context, to be agile in order to script its success.

(By Subrata K C Sharma, COO – Commercial, Brigade Enterprises Ltd)

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