It may take a few more weeks or perhaps months for employees to return to work at their offices in the aftermath of the third wave of COVID-19, but companies are already leasing large space in under-construction projects.
A case in point is the recent transaction wherein global investment bank Morgan Stanley leased 335,000 sq ft of office space in an under-construction commercial tower, Oberoi Commerz III, in Goregaon for almost 10 years from developer Oberoi Realty.
The transaction is in addition to the company’s earlier lease of around 600,000 sq ft of office space in the same tower in 2020. The total take-up of office space by Morgan Stanley stands at 916,762.77 sq ft, according to the supplementary agreement registered on February 23, 2022 and accessed by Propstack.
The builder in this case will be customizing four floors of the building for the company, brokers with knowledge of the transaction said. The rent is around Rs. 115 per sq ft (built-up). A 15% escalation clause kicks in after three years.
Morgan Stanley has pre-committed itself to an under-construction office space as against the option of leasing a ready commercial property. The lease tenure is set at 9.5 years and the project is expected to be ready in 2023, the document showed.
JP Morgan, TCS, Sanofi
In 2019, JP Morgan, the global banking and financial services provider, had pre-committed to 1.5 mn sq ft of commercial office space developed by Nirlon Limited
in Nirlon Knowledge Park (NKP) in Mumbai which was to be delivered in 2021.
With the Nirlon deal, the financial services giant had planned to consolidate its operations at one central location.
In 2016, Tata Consultancy Services Limited and Hiranandani Group sealed a transaction under which TCS picked up nearly 1.9 million square feet of office space in the latter’s commercial project in Thane.
The information technology company signed a 15-year lease deal with a reset clause that will set in every three years. The monthly lease rental for the space was between Rs 50 and Rs 55 per sq ft and the annual lease rental for the property was to be to the tune of Rs 100-120 crore. Hiranandani Group had to deliver the spacee in the next year-and-a-half.
In 2013, French pharmaceutical company Sanofi SA’s Indian subsidiary acquired 150,000 sq ft of office space from Larsen & Toubro Realty at its project in Powai for Rs. 220 crore. The company then had plans to shift its India headquarters from Andheri once the new built-to-suit exclusive building was ready.
Morgan Stanley’s lease of an additional 350,000 sq ft of office space in Oberoi Commerz III is an indication the investment bank is consolidating its Global In-house Centre (GIC) in a single campus, said Bappaditya Basu, chief business officer at ANAROCK Commercial.
COVID-19 impact
“As COVID-19 recedes and restrictions are being eased, many companies are calling employees back to the office and the commercial office sector is likely to witness an uptick in leasing activity soon. Also, post the first COVID-19 wave, employment picked up but companies did not add significant office space as WFH (work-from-home) continued for large global corporates. This demand is also likely to emerge shortly,” Basu said.
Companies are pre-committing themselves to leasing office space to ensure that rentals are locked in at competitive rates. Also, such agreements give companies a choice of the space that they wish to lease and can look to make changes in at the construction stage to suit their requirements, he added.
In Mumbai, it is highly unlikely for companies to get such large contiguous space in a project and hence they tend to become pre-commitments in under-construction projects wherein the timelines are defined for project completion.
“The cost of land and construction is very high in Mumbai and hence a landlord doesn’t hold inventory in commercial spaces,” said Gautam Saraf, managing director, Mumbai and New Business, at Cushman & Wakefield.
“They lease or sell basis an asset objective. Broadly, large occupiers used to renew but with growth and flight to quality, they are pre-committing to such newer developments. We are witnessing similar pre-commitments in Navi Mumbai from large domestic and MNC occupiers,” he added.
Built-to-suit trend
Going forward, the built-to-suit requirement for commercial real estate space may become a trend among corporate entities scouting for large office space of more than 300,000 sq ft.
“This is due to the fact that there aren’t too many options available in the market right now following three waves of the pandemic,” Karan Singh Sodi, regional managing director, JLL India told Moneycontrol.
In December 2019, to boost economic activity and expand the job market in urban neighbourhoods beyond the Mumbai Metropolitan Region (MMR), Maharashtra introduced new unified development regulations that offered a floor space index (FSI) of up to five for any form of commercial development on plots situated in both residential and commercial zones within the municipal corporation limits.
An FSI of five meant built-up areas up to five times the plot size. The prevailing commercial FSI usage across Maharashtra was less than three then. Since builders were waiting for the new rules, not much commercial supply was constructed in 2019. The market worsened in 2020 because of COVID-19. This led to the supply-demand imbalance that exists in the real estate market today.
“Having said that, today there are a large number of commitments from international firms, especially multinational banks, that are scouting for large floor plates for setting up global outsourcing centres in India,” explained Sodi.
Floor plate is the amount of leasable square footage on an individual floor of a building.
As for rentals, the larger the volumes, the higher the discounts. “Since the builder is assured of returns and is not building large floor plates basis speculative demand, the rentals offered are competitive,” he added.
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