The first quarter of 2021 saw office occupiers adopting a cautious approach while reviewing commercial real estate requirements. With increasing fears of a resurgence in the Covid-19 pandemic in the second half of March, certain occupiers went into wait-and-watch mode. The leasing momentum subsequently picked up after the second wave.
A report by Knight Frank India said that the total number of office transactions in the eight India markets in Q3 2021 reached 83 percent of the 2019 quarterly average level. Among the larger markets, Chennai, Bengaluru, and the National Capital Region (NCR) recorded the highest recovery in the third quarter of 2021, with transactions reaching the 123 percent, 112 percent and 93 percent levels, respectively, of the quarterly average in 2019.
The Information Technology sector was the largest consumer of space during the quarter and took up 34 percent of the space transacted. The heightened transaction activity from this sector is an extremely encouraging driver for office demand as it is the most prolific occupier category in the office market. Occupiers also took up nearly 23,500 co-working seats across the eight markets during the quarter, the highest this year, the report said.
According to JLL’s Office Market Update Q3, 2021, the mass vaccination drive and unlocking of the economy has aided in the revival of the office market.
The net absorption in Q3 2021 surpassed the net absorption recorded in Q1 2021 by 12 percent, painting a clear picture of improved market sentiments and growing confidence among occupiers, the report said.
The Bengaluru, Delhi-NCR and Hyderabad markets accounted for nearly 60 percent of the net absorption during the quarter. Net absorption includes fresh leasing in completed buildings and pre-commitments in buildings that become operational during the time being reviewed, and excludes exits/terminations, churns, renewals, and pre-commitments in future supply.
Mirroring 2021
Experts say that while 2022 is expected to sustain the gradual recovery, it will be far from the levels in 2019 as the requirements from occupiers will be judicious and calibrated. Co-working is expected to thrive owing to the flexibility it offers in these times of uncertainty.
The experts say that while it is still too early to predict the impact of the Omicron variant on the commercial market, it is likely that 2022 will be similar to 2021. The demand for managed office spaces and players will continue to remain strong in 2022 as well.
An analysis by ICICI Securities has said that pan-India net absorption of 18.5 msf (million square feet) is expected in CY21 (11.5 msf achieved in 9MCY21) and there may be a recovery in CY22E with net absorption of 26.8 msf. The key risk is a significant delay in return-to-office plans of corporates owing to any fresh Covid wave.
According to Samantak Das, chief economist and head of research, JLL India, the net absorption in 2021 is likely to be more than 25 msf and this is a number comparable to the average of 2020, which saw commercial real estate bear the brunt of the first wave of the pandemic. The average for the last five years except last year was around 32 msf of net absorption.
“There is a likelihood of the commercial market touching the 32 msf figure in 2022 provided the impact of the Omicron variant on the economy and the real estate sector is milder than the second wave,” he adds.
Factors that will weigh in
The hybrid model, work from home, work near home and work from anywhere will prevail in the medium term, especially for those sectors that can be managed by a hybrid model. The impact on REITs, too, is likely to be marginal as some sectors such as health and insurance may grow faster overall, reducing the impact on total net leasing. Since quality assets are important for REITs, there is expected to be traction in terms of green buildings. Also, many more buildings may get upgraded in the coming quarters.
Upgradation is expected to take place in case of both Grade A and Grade B buildings, Das said.
In terms of institutional funds flowing into real estate, 2021 may see anywhere between $3.8-4 billion. This is lower than the last couple of years during which more than $5 billion of investments were recorded annually.
“We expect this to be achieved in 2022,” he adds.
Sanjay Dutt, MD and CEO of Tata Realty and Infrastructure Limited is of the opinion that there will be “a surge in demand for Grade A offices, flexible/hybrid office spaces … with big companies planning to bring their workforce to offices. Additionally, leasing of large-quality office space is likely to increase as companies are increasingly hiring thus boosting the demand for commercial spaces across all cities”.
Venkat Narayana, CEO At Prestige Group, said that as far as the office sector is concerned, in 2021, leasing activity gained momentum and witnessed decent growth. However, net absorption across the top seven cities is yet to reach pre-Covid-19 levels. With office demand making a significant come back post the pandemic, new office completions across the top 7 cities have also improved. “We believe that demand for office space is set to strengthen backed by the increasing rate of vaccinations, affordable rentals, businesses resuming their expansion plans and Work from Office for many employees ami Covid protocols.”
Naveen Nandwani, MD, Commercial Advisory & Transactions, Savills India, is of the opinion that while it is a “little early to predict the occurrence of a third wave, it is likely that 2022 will be similar to 2021 for the real estate sector. The demand for managed office spaces and players will continue to remain strong in 2022 as well. As corporates continue optimising their real estate capital and operating costs, they will either re-negotiate in their existing spaces or relocate to comparable alternatives.”
Also, most employees have opted for a three-day work week from office with an option to continue working from home. This flexibility and a possible decentralisation of the tech industry will lead to the development of smaller cities as satellites for bigger companies. Changes in the way businesses operate will drive the growth in demand for commercial spaces in many tier-2 cities, he said.
Commercial leasing in 2021
After the second wave, most corporates had planned to get employees back in office, which resulted in an upsurge in renewals for office space.
Office space renewals accounted for 23 percent of the leasing post March 2020, up 8 percentage points from the pre-pandemic level, a report by Colliers and Propstack said in October.
Occupiers’ decisions are quicker than in 2020, with the focus on new-generation offices, said the Colliers and Propstack report, titled Evolving Office Space Trends in a Post Pandemic World.
The BFSI sector’s leasing has increased, with the thrust from Bengaluru, Chennai and Mumbai. Fresh leasing post pandemic was at 67 million sq ft, which is a drop of 45 percent from the pre-pandemic level, said the report.
Demand for new leases has improved significantly due to the robust hiring plans of firms in the IT-BPM, BFSI and manufacturing sectors looking to set up new global in-house centres, said Bhupindra Singh, Managing Director, Regional Tenant Representation and Office Services, North India, Colliers.
Salesforce leased 7 lakh sq ft of commercial IT space in Hyderabad for about Rs 5 crore a month. The lease was registered in October 2021.
KPMG Global Services Pvt Ltd leased commercial space in Mumbai for five years at a rent of Rs 37 lakh per month.The consultant has leased 24,788 sq ft of space at Nesco IT Park from October 1, 2021, to September 31, 2026. According to the documents, the rent-free period of four months is from October 1, 2021, to February 1, 2022. The lock-in period is for three years, the documents showed. The company has leased the 13th floor, Central B wing at NESCO IT Park from NESCO Ltd. The leave and licence agreement was registered on October 29, 2021.
Co-working segment expected to gain traction in 2022
Co-working is expected to thrive owing to the flexibility it offers in these times of uncertainty. Amit Ramani, founder and CEO of Awfis, said that the co-working segment is expected to witness incremental demand in 2022.
The company is diversifying by partnering with hotels and malls to expand its base in other parts of the country. “Along with this, we have also diversified our product line to cater to end-to-end workspace requirements of large occupiers, including workspace design, management and FM services,” he said.
He agrees that the past two years have been unprecedented and riding the third wave will definitely be a challenging hurdle, across sectors.
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