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Are corporate tenants reworking office space strategy to beat pandemic woes?

Many corporate tenants have put plans to lease additional space on hold. Some have opted to give up part of their office space to save real estate costs

Representative image
Representative image

The impact of COVID-19 continues to unfold across business segments. Like any other industry, the commercial office market space has also been affected.

Despite the current crisis exposing the fragility and vulnerabilities of some businesses, many are stepping up their game, though the strategies differ, corporates and developers share a common goal—thriving despite the pandemic.

Corporates rethink office space needs

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In the initial days of the lockdown, corporates scrambled for ways to adapt to the new norms and maintain business continuity. Overnight, work-from-home became a widely accepted concept for companies to operate in the short to medium term given the situation.

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Bhavin Thakker
Bhavin Thakker
MD, Mumbai & Head, Cross Border Tenant Advisory|Savills India

    As companies gear up to adapt to the ongoing pandemic, office space design and layouts are being relooked to ensure social distancing. Hygiene and employee wellbeing are taking top priority for occupiers so much so that the pandemic could not only potentially influence future office designs, but also the allocation of collaborative and social spaces within the office as well as overall density of the office space post-COVID-19.

    We are also witnessing the re-emergence of flexible co-working spaces as companies try to reduce the cost pressure and avoid long-term commitment. As occupiers relook at their real estate strategy, some companies are exploring co-working spaces where they would not require heavy capital investment.

    Most occupiers are on a wait and watch mode and have refrained from taking up any long-term calls amid the ongoing pandemic. Plans to lease additional space have also been on hold for many companies as there are uncertainties over how long the pandemic will last or if there will be large scale impact of work from home or agile workspace in the coming months.

    Having said that, it is interesting to see few multinationals with long-term commitments to the Indian market signing up large scale office leases notwithstanding the current slowdown.

    Despite agile-working gaining more relevance under the current circumstances, such deals continue to reinforce the importance and need of office spaces for various reasons including collaboration purposes, brainstorming of ideas and bonding between colleagues. But most importantly such transactions indicate that the growth fundamentals of this country remain intact despite the temporary blip due to the pandemic.

    Hub-and-spoke model may gain ground

    New trends are foreseeable in the near future as companies brace up to adapt to the new normal and re-strategize their real estate needs. With the pandemic yet to see its end, it is important to watch out if occupiers are willing to hold on to their big campuses or opt for a hub and spoke model.

    In this model, a company could have a headquarter (HQ) or the main city office as its ‘hub’, like in a prime locality, say BKC in Mumbai, apart from setting up smaller offices or ‘spokes’ spread across the city, say one each in Lower Parel, Andheri East, Goregaon or Malad, Powai, Thane and Navi Mumbai; and probably one in Nariman Point too!

    Of course, the number of spokes and the size of these offices would depend on the overall size of the company, employee strength and locations where employees reside. We expect adoption of this model to gain more ground in the medium to long term given the talent war amongst companies and growing emphasis for organizations to be employee friendly.

    Landlords and tenants opt for renewal of agreements

    From the developer or landlords’ perspective, the first initiative that they had to take was to immediately adopt strict hygiene protocols in office buildings. In a normal circumstance, any landlord’s top priority is to maintain a high occupancy rate of their office buildings.

    But in the current scenario, retaining tenants and occupiers has become the new priority. Even during the early days of the pandemic, office buildings were kept open while few others were operational for critical work. While many office occupiers requested for concessions and waivers, most developers and landlords have not heeded much to those requests.

    On the other hand, tenants whose lease agreements were expiring began to evaluate their portfolio to assess their need for space from a medium-term perspective.

    Those corporates who were planning to expand or move to a better or cheaper office premise pre-COVID-19 realized that relocating to a new place will require a large capital investment as well as a long-term commitment. Usually, the lock-in periods for such office deals range between 3 and 5 years and these agreements are signed from a long-term perspective.

    To avoid the above two large-scale and long-term financial outflows in these uncertain times, many tenants whose lock-in periods are ending, are renewing their agreements to maintain the status-quo. However, there are others who also opted to give up part of their office spaces to save real estate costs.

    New emerging growth drivers

    The overall vacancy rates of Mumbai have marginally increased from 13 percent recorded at the end of 2019. While we may continue to see a slight increase in the vacancy rate in the next couple of quarters, we do not anticipate this to last in the long run since new businesses and business models will emerge in the post-pandemic era.

    Some obvious sectors such as pharma and life-sciences will surely get a booster while there will be other sectors that will boom. These could potentially be health and wellness, e-learning and ed-tech sector, industrial and logistics sectors, digital collaboration, cybersecurity, gaming, remote medical services, e-retail with delivery integration among others.

    Over the medium-term, these sectors might make up for some of the existing office occupiers that are giving up space at the moment.

    The author is managing director, Mumbai and Head, Cross Border Tenant Advisory, Savills India
    First Published on Sep 17, 2020 11:37 am
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