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COVID-19 first vs second wave: How does it stack up for commercial real estate?

Some companies will also become cautious in taking their full requirements in one go and may choose to work in managed workspaces under a similar flex model as they observe how 2022 and beyond would unfold.

COVID-19 first wave perhaps hit the hospitality sector the hardest.

COVID-19 first wave perhaps hit the hospitality sector the hardest.


The second wave of COVID-19 came in as a rude shock. While there was a relative improvement in sentiments in October and November 2020, the pandemic reversed all the gains.

Many offices which had been promoting work-from-home, especially the larger IT/ITES/BFSI companies, had started to believe that they would be in a position to get some of their work forces back to office in the June quarter of 2021 but that was not to be.

Let's take a look at how the first wave impacted the commercial real estate market. While the medium-term view on commercial leasing stayed strong, it was clear that corporates were going to delay decisions on taking on new space. At the same time, we did not witness much movement from companies shifting from high cost rentals to low cost ones.

This shows that in the long term, most IT-ITES and financial service companies would like to bring back their employees. After several years of bullish demand and steady annual rental increases of 4-5 percent in most markets, rents went flat to marginally negative. Most landlords with size and scale were still able to collect rentals during this period, as apparent by the almost 90 percent plus rent collections declared by both Embassy Office Park REIT and K Raheja REIT in their March 2021 results.

The top seven cities of India recorded an average net leasing of about 26 million square feet in 2020 against 46 million square feet in 2019. From a capital value perspective, valuations did see a climb down with cap rates going up by 50-100 basis points. Projections for rental increases were also moderated.

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COVID-19 Vaccine

Frequently Asked Questions

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How does a vaccine work?

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.

How many types of vaccines are there?

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.

What does it take to develop a vaccine of this kind?

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.

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Retail, as we all know and can see, was badly hit. The shutdown for three months or so and the slow opening up meant a massive drying up of revenues. Most mall owners had to pass on rent free benefits to tenants and in some cases move to a totally variable revenue sharing structure for a period of six months. The worst affected were the not so well managed ones. Trends in early 2021 seemed to indicate that malls were averaging about 70 percent of the revenues that they were clocking, prior to COVID-19.

COVID-19 first wave perhaps hit the hospitality sector the hardest. Hotels took a massive hit with revenues down by 60-70 percent compared to pre- COVID-19 levels. As the country climbed out of the throes of wave one, hotels in leisure destinations like Goa, Rishikesh, and the family resorts at a drivable destination from big cities, began doing well, with people raring to step out.

Despite clocking a fantastic January to March quarter in FY 21, the overall hit to India’s hospitality sector was massive and revenues fell substantially.It’s worthwhile to note that both retail and hotels had experienced a heady run in the preceding years to 2020.

Crystal ball gazing: Trends that may emerge post the second wave

Here I am relying on a firm belief that a majority of Indians will be vaccinated by the end of 2021 strengthening our defense against a possible third wave.

Leasing in the commercial sector will start to inch up, and we could reach the pace of growth seen between 2015-19. This I believe should happen by the second quarter 2022. However, there will be some strategic shifts.

There will be a strong preference for quality commercial buildings which satisfy tenants on keeping their workforce safe - larger open spaces, use of technology to mitigate human interaction, large lifts, good ventilation systems.

All these will be non-negotiable requirements for global and corporate occupiers. One could also see a marginal move to the hub and spoke model, with enterprise clients taking up smaller, flexible spaces, so employees can work closer to their suburban homes, and eliminate the need to travel larger distances in shared cabs, shuttles and metros.

Some companies will also become cautious in taking their full requirements in one go and may choose to work in managed workspaces under a similar flex model as they observe how 2022 and beyond would unfold.

While foreign investments would remain high in good quality leased commercial buildings, I also see the risk return expectations reduced for new developments under construction by large and credible developer partners.

The spaces of the future will also need to incorporate modifications sought by tenants for health and safety. Modern grade A developments, refurbished for the 'new normal' will command higher rentals and higher occupancy. We are poised for massive consolidation in commercial with weaker single asset owners wanting to divest – as they struggle to retain tenants. Foreign investments will keep pace with what we have seen in the last 5-7 years in this space.

We will see many more REITs going forward as listed unit prices start reflecting the inherent strengths of this asset class. Another trend which could catch on is of strong asset managers and developers joining hands to pick up stressed office assets to refurbish them and successfully renting them.

Hotels in India will make a smart bounce back, especially those in the leisure travel space. These hotels will do well, and travel overseas will remain tricky in 2021. As business travel picks up with the pace of vaccinations, top seven cities hotels, aimed primarily at the business traveller, will also pick up occupancy. We will start seeing occupancy inch up starting the third quarter of 2021 and reach 60 – 70 percent of 2019 levels by second quarter 2022.

There will be a move to open smaller, boutique hotels which are perceived to be safer. There will be a consolidation in the industry with single hotel owners realizing that running hotels in a post COVID-19 world, is a specialized business. The challenge in this consolidation, will be to bridge the valuation gap between what buyers are willing to pay and what sellers will want.

Malls have shown us that they could bounce back very quickly post the 1st wave, even though revenues were still at 60-70 percent levels compared to the pre-COVID-19 period. Here again, the larger ones with strong balance sheets will ride out the storm with quick integration of safety measures. Post-COVID-19 wave one, malls got fewer visitors than before, but with a much higher propensity to spend. We could again see some consolidation in this space.

One thing is for sure - we have always had the ability to bounce back quickly and I don’t foresee that changing this time around too. As the saying goes, the best is yet to come.
Gagan Randev is Executive Director, India Sotheby’s International Realty.
first published: Jun 23, 2021 12:01 pm
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