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COVID-19 second wave: Commercial real estate space occupiers put leasing plans on hold

The leasing momentum in the upcoming quarters will mainly depend on the time taken to contain the pandemic; rental escalation a far cry in the present circumstances

Representative image

Representative image


Ever since the first wave of COVID-19 struck last year compelling corporates to put their employees in work-from- home mode, several corporates across the country have renegotiated rentals with their landlords. As companies reel under the second wave of the pandemic, they continue with reduced rentals carried forward from the first wave which, real estate expert say, may carry on until the end of the year.

 

Landlords also continue to be accommodative of the demands of occupiers. Across markets they are more flexible in providing increased rent-free periods, reduced or zero rental escalation and fully furnished deals to occupiers in order to close deals. They also continue to be flexible doling out new rental plans such as ‘move-in-now’ but start paying rent after three months or get additional three months at the end of the lease tenure. With such attractive schemes dotting the commercial property market, rental escalation, an important component of the lease agreement, is a far cry at the moment.

 

To cite an example, a corporate that has a 2 lakh sq ft office on lease in Gurgaon, was paying a rent of Rs 55 per sq ft before COVID-19 last year. As per the rental agreement, signed three years ago, a rental escalation of 15% was due in 2020 which would have meant a rent of Rs 62 per sq ft per month. However, the rent being paid by the company after it renegotiated terms last year with the landlord is Rs 51 per sq ft. Besides, it did not pay rent for three months last year and will not pay any amount this year during the lockdown period because of a ‘force majeure’ provision that it incorporated in its lease document last year post the renegotiation.

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One company has managed to sign on a lease agreement that allows it to move in now but start paying rent from September onwards. Another company that had signed a three year lease last year, managed to negotiate terms with the landlord that permits it to pay rent for 36 months but utilize the space for 39 months in lieu of the three months lost last year on account of the lockdown.

 

Brokers told Moneycontrol that commercial rentals have corrected by 20-25% since the first lockdown was imposed last year. Also, most landlords are willing to negotiate terms and even waive off rent during the lockdown for fear of losing tenants.

“Some tenants are paying 40% less as per the agreement as there has not been any rent escalation of 15% due every three years. It is not even a part of discussion and may continue until December this year,” said Gurpreet Ratra, Executive Director, T and T Realty Services, a real estate consultancy firm based in Gurugram, to Moneycontrol.

 

Office space trends in Q1 2021

According to an analysis by JLL, on an annual basis, the year 2020 witnessed net absorption of 25.6 mn sq ft while new completions were recorded at 36.3 mn sq ft. Market activity dipped substantially when compared to 2019. However, 2019 was a year of historic highs.

 

Also, while 2020 ended on a relatively high note, there was still uncertainty in the market with respect to resumption of business as usual. In Q1 2021, occupiers adopted a cautious approach and focused on reassessing their real estate portfolios and long-term commitments. Moreover, a spike in COVID-19 cases in the second half of March pushed the occupiers to press ‘pause’ again. Consequently, market activity in Q1 2021 remained subdued with net absorption decreasing by 33% when compared to Q4 2020, JLL said in its Office Market Update: Q1 2021.

 

The office market witnessed a net absorption of 5.53 mn sq ft in the first quarter of 2021, a decrease of 33% when compared to the last quarter of 2020. As corporate occupiers postponed their real estate decisions, net absorption of Grade A office spaces reduced in most of the markets under review. On a y-o-y basis, net absorption in Q1 2021 stands at 64% of the levels witnessed in Q1 2020, it said.

 

In Q1 2021, occupiers continued to review their real estate portfolios and adopted space optimisation strategies in order to minimize costs. The subdued net absorption levels could not keep pace with new completions. This resulted in overall vacancy increasing from 14.0% in Q4 2020 to 14.9% in Q1 2021, it said.

 

According to Samantak Das, Chief Economist and Head of Research & REIS, JLL India, Q1 2021 saw office occupiers adopting a cautious approach while reviewing real estate requirements. With increasing fears of a resurgence in the COVID-19 pandemic in the second half of March, certain occupiers have gone into a wait and watch mode. The leasing momentum in the upcoming quarters will mainly depend on the time taken to contain the second wave of COVID-19 cases.

 

“Small and mid-segment occupiers/corporates are definitely looking at lower rental business districts and as a result some of these business districts are witnessing exits across the top cities. Larger corporates are definitely in discussion with landlords on rentals as it happened in 2020. Also, some are looking for consolidation of space to continue work-from-home and to optimize the real estate portfolio,” Das told Moneycontrol.

 

Some corporates are even looking at distributing their offices across the city with a smaller one as the hub. So there will be one small central hub and rest of the offices spread in such a way that they are closer to clusters of employees. This will facilitate employees to work from 'nearer to their home' locations. These centres can also be flex office spaces where the occupiers will save on the capital expenditures with respect to fit-outs, he said.

 

Vacancies have increased in Jan-March quarter across most of the cities but “We have not yet seen any reduction in headline rents. But there are negotiations happening,” he added.

 

According to the JLL analysis, in Delhi-NCR, IT/ITES, BFSI, Healthcare, legal and consulting firms dominated leasing during the quarter. The major transactions in Delhi NCR in the first quarter included Cyril Amarchand Mangaldas at Max Towers in Noida, Syneos Health at DLF Downtown in Gurgaon, Webhelp at DLF Center Court in Gurgaon, etc.

 

Eight projects totalling to 4 mn sq ft were completed during the quarter. The newly completed projects were just 15% precommitted in terms of cumulative area. The vacancy rate stood at 29.3% as at the end of quarter, increasing by 140 bps over the previous quarter. Vacancy levels rose in select prominent prime business districts where occupiers either downsized current occupancy or shifted to locations with relatively lower rents.

 

Rents remained stable with developers offering increased rent-free periods on a case-by-case basis. It is expected that rents will continue to remain. In Mumbai, miniscule net absorption of 0.24 million sq ft was observed in Q1 2021, dropping by 74% over the previous quarter and by almost 90% from the pre-Covid levels of Q1 2020. Leasing activity during the quarter was driven majorly by renewals and consolidation. SBD BKC saw the maximum leasing activity followed by West Suburbs and Navi Mumbai. The quarter witnessed few large deals in West suburbs and Navi Mumbai while absorption in SBD BKC was mostly contributed by the pre-committed office space in the newly completed project.

 

Sectors such as IT/ITes, Consultancy and manufacturing/Industrial sectors drove leasing during the quarter. Exits by few occupiers and higher increase in new supply as compared to increase in net absorption led to rise in vacancy rate by 130 bps to 14.9% at the end of the first quarter. Overall city’s rent and capital value were stable during the quarter. However, rents remained under pressure in the submarkets of SBD North, SBD Central and Navi Mumbai where vacancy was relatively higher.

 

The investment appetite remained strong with investors and funds constantly looking to pick up marquee commercial and stressed assets. YES Bank acquired Reliance Centre (0.68 mn sqft), Santacruz, for Rs 12 billion from Reliance Infrastructure Ltd, the analysis said.

 

Subrata K C Sharma, Chief Operating Officer- Commercial, Brigade Enterprises Limited, said that while office transactions are currently in suspended mode, due to various corporates adopting work-from- home and work from anywhere models, what is encouraging is the fact that the IT/ITES sector is witnessing robust hiring. What also adds to the sentiment is the commitment of new tenants emanating out of Bengaluru and Chennai, who are looking to occupy their respective premises once the situation normalizes.

As for rentals, buildings where the vacancy is above 10-15%, there is pressure on rents and discounts are being offered.

Experts said that some companies who may have decided to pause now due to the second, may come back to the discussion table by June. Large corporates may decide to utilize get to the full occupancy mode and then think of expansion plans perhaps in the October-December quarter provided there is no third wave.

Lease terms renegotiated; new contracts with specific force majeure provisions drawn up

During the first COVID-19 wave, many corporates across the country had explored reducing their commercial leasehold properties in India, and have renegotiated their long term leases.

“We have also seen some tech-related companies and co-working space operators terminating their leases and restricting their immediate expansion plans for the Indian market. I would say that after the recent spike in the number of COVID cases, a certain degree of skepticism has returned to this sector. Once again, work from home is reaffirming its position as a sustainable and efficient model,” said Yudhist Narain Singh, advocate, YNS & Associates.

“We have also observed that several lessees have revised the force majeure provisions of their leases to specifically include pandemics and circumstances which are beyond the control of the parties,” he said. Some firms, under the renegotiated conditions, have incorporated safeguards and may not be paying rent during the current lockdown.

 

A lease document accessed by Moneycontrol clearly mentions that the outbreak is a force majeure condition since it is beyond the control of anyone to prevent the same and its consequences. The finance ministry has classified the coronavirus outbreak as a natural calamity, and covered by the Force Majeure clause (FMC).

 

“The purpose of lease deed/ LLA was running of operations from the Demised Premises, however, the same has become impossible owing to the current situation. We are accordingly constrained to invoke force majeure and doctrine of frustration as enshrined in Section 56 of the Contract Act in respect of the Lease Agreement. Please take note that in view of the stoppage of business due to the above factors we shall be suspending and not be making payment of lease rent/ license fee. The suspension shall be for a period in line with the orders of the Government of India or the relevant State Government and as extended from time to time. The position shall be reviewed after the end of the said period.”

Going forward

Experts said that the second wave of COVID-19 cases is likely to only be a short term blip and the year 2021 is expected to witness close to 38 mn sq ft of new completions, while net absorption is likely to hover around 25-30 mn sq ft. This will be at par with the net absorption levels witnessed during 2020. It will continue to be lower than the average annual net absorption levels of around 32 mn sq ft seen during 2016-2018.

 

Nevertheless, it is important that landlords continue to be receptive to the demands of tenants and offer flexible options, in terms of space as well as value. Flexibility and increased focus on sustainability are expected to define the office market in the next normal world, Das added.
Vandana Ramnani
first published: May 6, 2021 02:48 pm

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