As economic activities got disrupted following a nationwide lockdown, the fallouts started to emerge in an otherwise buoyant office real estate.
The Indian office real estate looked promising in 2019, with a fresh supply of over 50 million sq. ft. and a net absorption that hovered north of 45 million sq. ft – primarily driven by IT/ ITeS, BFSI, consulting & co-working spaces. In the upcoming markets such as Bangalore, Chennai & Pune, total vacancy was in single digit, further underscoring the robustness of the Indian office real estate.
Despite strains visible in the Indian economy, the corporate world was betting big on India’s long-term growth potential. An unprecedented amount of institutional money was poured into the office real estate, which also featured Greenfield & Brownfield projects alongside ready-to-move-in assets.
However, the bullish run could not last long. As economic activities got disrupted following a nationwide lockdown, the fallouts started to emerge in an otherwise buoyant office real estate. Due to uncertainty & paranoia, larger organizations are deferring key leasing decisions. Despite realtors trying out the digital way, aggregate sales & leasing activities have plunged. Quality Vacant supply in SBD of cities and Upcoming Large Floor areas in TBD of cities were the most preferred spots for decision making by Office Occupiers for 2020 also.
Even post suspension of the lockdown, there will be possible restrictions on the frequency of domestic travelers and restrictions for International Travel, which will continue to slow down the growth in the sector.
Likewise, developers will also stay away from new launches. Only those projects will start shortly, which are in the last miles of completion (6 months -1 year) that can foresee the window of sales or lease.
It will take some time for the current arrest in economic & business activities to reverse, & hence distress in the office real estate will be visible. Meanwhile, to cope up & adapt to the mounting pressure, new concepts will emerge. These would not just be operational but will entail a wider structural impact.
Rental Concessions & Revisits: As most of the business activities have paused (or plunged), organizations will ask for rental concessions or deferments with their landlords. This is not just an Indian trend, but a common denominator across the world. Likewise in the next 2- 3 months, most of the business will ask for rental revisits. Generally, rents constitute 5-9% of the topline or revenues. As business activities have disrupted, organizations will revisit their books & accounts to calculate new numbers. Accordingly, they will negotiate on rentals. While in many cases landlords will agree to work on negotiated terms, in some cases, it might be inconclusive, thereby leading to exits. As a whole, the industry is going to see a higher number of structured solutions for continuity and exits.
Refurbishments & Decentralization: New regulations are expected with regards to office space utilization, layout & safety standards. Currently in manpower-intensive service industries such as IT/ ITeS, BFSI, etc, per person, usable space is mostly 30-45 per sq. ft . However, in the light of more social distancing & healthier working environments, such organizations will be mandated to allot larger space. Although existing office spaces cannot be expanded, organizations will need to redesign & reconfigure their existing space to ensure de–densification & contain future challenges.
Besides, many organizations will also decentralize, to manage and control the space utilization and hygiene, others can work in an undeterred fashion.
New Products in Market: As a corollary to rise in exits & decentralization, demand for quality yet affordable products will also rise. As a response to changing dynamics, investor activities will also steadily grow. The rise in investments will also be rooted in the fact that many investors are looking for risk mitigated assets that can offer concurrent income & smarter ROIs. As the financial markets are staggering, commercial real estate might be a prudent alternative.
As market dynamics will evolve, so will be the developer’s offerings. The market is expected to see a plethora of new products often in the range of ~50 lakh, something which has not been seen before in commercial real estate. Developers are expected to give additional benefits such as Re Planning the floor plan with smaller units to mobilize better if that’s possible depending upon approval authority and accordingly looking into the services side, Payment plans with escrow mechanisms, One Year Free Common Area Maintenance (CAM), lease assistance, assured rentals, etc. to incentivize more leasing activities. Leasing for the community will be the initiative for Next for taking up small steps and fitting in with the right space at an affordable cost.
The Weakening of Rupee & the Rise of NRIs: Despite the slowdown, NRIs will continue to deepen their foothold in the commercial Indian real estate. In the past 12 months, the value of rupee has depreciated by more than 10%. Although this is not a very welcome sign for the economy, which is already marred with a widening of fiscal deficit – this will be a shot in the arm for NRI buyers. Amidst global contingencies, many NRIs are looking for safer & smarter investment options. Commercial real estate with recurring rental income & smarter mid-term appreciation potential will fit into the requirements of the expatriate class. Affluent NRIs will even look out for portfolio investments. With a short term, horizon Gold is expected to perform and will be trending in a smaller format while mid-to-long term time horizon without having much debate the trend is and will be real estate on ready to move and with location and developer profiling it will be linked to under construction investments/end-use.
A Slowdown is inevitable: Despite the industry trying to calibrate to evolving business dimensions, a slowdown is inevitable in office real estate. As per research by 360 Realtor’s business intelligence unit, total new leasing activities are estimated to be down by over 50% in FY 21. Likewise, a rent compression of 10-25% is expected for 2-3 quarters in mid-to-large size areas depending upon locations. All the stakeholders – real estate companies, investors & landlords need to realize it and do their business scenario planning accordingly.
(By Ajay Rakheja, Sr. VP-Commercial Real Estate, 360 Realtors)