The COVID-19 pandemic threw life out of gear in 2020 and the real estate sector continues to grapple with it. It also left a mark on the workplace, flexible or otherwise. Both the workforce and workspace underwent a change with the work-from-home option bringing about a paradigm shift. Commercial real estate occupiers treaded through some very uncertain times and the pandemic-led anxiety prompted lease renegotiations, rent waiver requests and rent deferment discussions early on during the crisis.
The work-from-home concept also led to some companies looking at setting up multiple office spaces in micro-markets that cater to their existing employee demographics. This is expected to continue even after the vaccine finally sees the light of day in the country.
Going forward, companies are expected to plan their space consumption keeping in mind factors such as flexibility in lease terms, minimum capital investment, rental costs, lower commute time for employees, last-mile connectivity and social-distancing.
What this means is that even if the vaccine is introduced in the next two months, the work-from-anywhere or the work-from-home culture is expected to continue for the medium term, which is for about a year. One will also witness a mix of work-from-home and work from the office.
“Going forward in the mid to long term the work-from-home will disrupt office leasing up to 20 percent,” said Samantak Das, Chief Economist & Head of Research at JLL India, adding the hot desking concept is here to stay but with modifications, which will include Covid-19 protocols.
Frequently Asked Questions
A vaccine works by mimicking a natural infection. A vaccine not only induces immune response to protect people from any future COVID-19 infection, but also helps quickly build herd immunity to put an end to the pandemic. Herd immunity occurs when a sufficient percentage of a population becomes immune to a disease, making the spread of disease from person to person unlikely. The good news is that SARS-CoV-2 virus has been fairly stable, which increases the viability of a vaccine.
There are broadly four types of vaccine — one, a vaccine based on the whole virus (this could be either inactivated, or an attenuated [weakened] virus vaccine); two, a non-replicating viral vector vaccine that uses a benign virus as vector that carries the antigen of SARS-CoV; three, nucleic-acid vaccines that have genetic material like DNA and RNA of antigens like spike protein given to a person, helping human cells decode genetic material and produce the vaccine; and four, protein subunit vaccine wherein the recombinant proteins of SARS-COV-2 along with an adjuvant (booster) is given as a vaccine.
Vaccine development is a long, complex process. Unlike drugs that are given to people with a diseased, vaccines are given to healthy people and also vulnerable sections such as children, pregnant women and the elderly. So rigorous tests are compulsory. History says that the fastest time it took to develop a vaccine is five years, but it usually takes double or sometimes triple that time.
In such a scenario, there will be substantial potential for data centres, warehousing and even co-working in the mid to long term. And that’s perhaps where investors ought to think about investing.
The data centres’ story
COVID-19 has forced us to remain digitally connected. In fact, this dependence of several sectors on digital infrastructure is what partially helped mitigate the impact of the lockdown. Investments were made in about 14 data centres in 2020, with a strong pipeline for next year.
As a matter of fact, industries, institutions, as well as individuals have taken to cloud adaptation, and data consumption is at an all-time high. All this consumption is fuelling the demand for data centres in the country.
According to an analysis by JLL India, the data centre industry is expected to add 703 MW capacity by the end of 2025, translating into an opportunity of 9.3 million sq ft of real estate development. Mumbai is expected to garner a significant share of this impending opportunity owing to its existing data centre infrastructure, followed by Chennai and Hyderabad. These capacity additions would require greenfield investments to the tune of 4.9 billion dollars to fuel the future development of the sector.
According to Anurag Mathur, CEO, Savills India, the Indian data centre market is witnessing robust growth in the era of virtualization and cloud computing. Government initiatives such as Digital India and emphasis on self-reliance and data protection through data localization is expected to increase the volume of data in the country, which will result in increased demand for data centres and cloud services.
The 5G technology, which is likely to be launched in 2021, will push the adoption of IoT-enabled products in the Indian market. The market for big data and IoT is still in the nascent stage of growth. However, it has huge potential to be the strongest driver for data centre investments in the Indian market, he said.
Latest ANAROCK data also points out that India will see at least 28 large hyper-scale data centres constructed over the next three years. These will span over 16 mn sq. ft. with at least 1,400 plus MW of IT power capacity.
In 2021, therefore, this will increasingly be a deep-pocketed play. “Therefore, just about half a dozen real estate Indian players will venture into data centre development business. It would largely be dominated by foreign investors and developers,” says Anckur Srivasttava of GenReal Advisers.
The pandemic led to a break in the supply chain across industries in the country that further resulted in an increasing demand for storage space from the daily necessities, electronics and FMCG sectors.
Growing demand for cold chain and pharmaceutical warehouses, boost in manufacturing and e-commerce growth are likely to further drive the growth of the segment in 2021.
E-commerce is expected to flourish in the post-Covid era, giving an edge to online businesses which will eventually boost new warehousing demand - particularly multi-level warehouses within city limits.
The current government has created a fertile arena for growth, with the total approvals needed to set up a warehouse in India being reduced from 33 in 2015 to 15 by 2019-end.
Likewise, the time taken to construct a warehouse has reduced to 3.5 months from the previous 6 months during the same period.
A recent report by US-based Binswanger Commercial Real Estate Services and ANAROCK Group titled Indian Industrial & Logistics – Gearing Up a Global Manufacturing Hub had said that there is a massive opportunity for Grade A warehousing development in smaller cities amidst rising demand.
The emerging tier 2 and 3 hubs include Ludhiana, Ambala, Lucknow, Siliguri, Guwahati, Bhubaneshwar, Vishakhapatnam, Vijaywada, Coimbatore, Kochi, Nagpur, Indore, Jaipur and Dholera.
“Amidst the growing clamour for making India a global manufacturing hub, warehousing clusters are seen to be expanding rapidly beyond the top cities to tier 2 and 3 cities. Demand for Grade A warehousing properties is rising across the country.
Notably, as per ANAROCK data, there is more than 110 mn sq. ft. of Grade A warehousing stock available across the country, the majority in the top 8 cities. 3PL and logistics and e-commerce are the largest occupiers of warehousing space. Thus, there is a high opportunity for Grade A warehousing development in smaller cities amidst rising demand,” explains Anuj Puri, chairman, Anarock Property.
And why has this happened? The Indian warehousing market has performed well in comparison with the other asset classes, led by strong growth in domestic supply for essential goods and e-commerce growth, says Anurag Mathur, CEO, Savills India.
“Our estimate is that we may witness warehousing supply of about 50 million sq. ft and absorption of around 45 million sq. ft in 2021 across metros and tier II cities. Growing demand for cold chain and pharmaceutical warehouses, boost in manufacturing and e-commerce growth are likely to further drive the growth of the segment in 2021. In addition, favourable government policies, increased number of 3PL companies apart from increased investment activity in warehousing asset class will boost the segment in the coming years,” he adds.
Co-living and co-working
Both the co-living and the co-working segments saw subdued activity in 2020 largely on account of COVID-19 and the focus on social distancing norms.
COVID-19 brought back the focus from ‘shared’ to ‘exclusive’ with hygiene and safety becoming primary concerns.
Going forward, while the former may take a while to make a comeback, co-working could see higher occupancy as many would prefer to see this as a mid-path between work-from-home and work-from-office.
As corporates return to the workplace, they are likely to further leverage flexible space to reduce capital expenditure and create cost savings, while allowing for split teams and de-densification requirements. Developments that initially drove the growth of the flex market, like the focus on utilizing workplaces to boost productivity and drive dynamic work cultures, enhance emphasis on employee health etc., will continue to influence the next phase in India.
In November, JLL India’s report titled Reimagine Flexspaces A 360-degree view had said that India’s flexible space market to cross 50 million sq ft by 2023. It noted that the country is expected to witness deeper penetration, throughout 2021 and beyond.
Irrespective of several short-term disruptions and challenges, increased demand from large enterprises will support the growth of the flex space market to more than 50 mn sq. ft. by 2023. It is anticipated that flexible space will grow by an average of around 15-20% per annum over the next three-to-four years, although this trajectory will not be linear.
“Flex space operators have changed the face of commercial real estate with their innovative offerings. This market is projected to grow at a steady pace throughout 2021 and beyond. Resultantly, the market penetration of flex spaces into total office space is likely to see a gradual increase from the current 3.0% to 4.2% by 2023. We expect this growth to continue, driven by demand, profitability and return-profile for investors, albeit at a slower pace resulting from the impact of COVID-19,” said Ramesh Nair, CEO & Country Head (India), JLL.
At present, Bengaluru and Delhi NCR together account for more than 50% of the flex space stock in India, with Bengaluru housing around 10.6 mn sq. ft. of such spaces. Hyderabad with 4.5 mn sq. ft. and Mumbai with 4.3 mn sq. ft. of flex office stock follow.
Co-working players are expected to reposition themselves and continue to drive the commercial real estate market of the country in 2021.
According to Mathur, as organisations reassess their overall office space requirements and look for workplace flexibility in the wake of the pandemic, co-working operators will reposition themselves and continue to drive the commercial real estate market of the country.
“We expect leasing by co-working operators is expected to increase by 42 percent in 2021 at 4.9 mn sq ft over 2020,” he said.
Co-working companies, too, are bullish on the demand for flexible office space post the pandemic.
Nidhi Mawrah, Group Managing Director, The Executive Centre, South Asia, told Moneycontrol that going forward “most corporates will look to cut capital expenditure on setting up their own offices. Most companies now are adopting the hub-and-spoke model which not only reduces commute and travel for employees but builds on the concept of convenience and flexibility. More importantly, the current disruption has made low-density floor plans an important criteria to maintain safe social distancing.”
In the pre-pandemic era, flexi-spaces were mainly taken up by SMEs and start-ups, but post the lockdown, they have emerged as the preferred choice for large corporates.
“This is due to the various advantages associated with it. These include collaboration, Grade A infrastructure, safety and convenience. Seeing these merits in this real estate option, leading organizations are now readily partnering with flex workspace providers like us for sustainable solutions to both, work from home and work near home, for the foreseeable future,” explains Amit Ramani, founder and CEO, Awfis.
In 2021 too, most corporates are likely to increasingly move away from traditional real estate models and adopt co-working spaces as part of the distributed workspace model. This will allow their workforce to operate remotely from a flex workspace near their home.“As a result, we expect the demand for co-working spaces to continue to rise in the coming year. Leasing activity by co-working operators is expected to increase by 42 percent in 2021 over 2020, to reach 4.9 mn sq ft,” he said.