The year 2020 turned out to be a whirlwind one for the commercial real estate sector. The ongoing pandemic has accelerated the sweeping changes that had already been underway because of technological advancements. It also laid the foundation for multiple emerging trends such as agile workspaces and workplace wellness that are now gradually becoming more established. Now, 2021 is witnessing the commercial real estate market going through a reckoning.
The year started on a positive note with employees going back to the office in increasing numbers. However, the second wave of infections dampened the mood again. The learnings of the past year including adaptability and innovation will hold good for 2021 as well but as the sector undergoes post pandemic recovery, there are inevitable trends emerging which could eventually reshuffle office markets for good.
Reorganisation of office districts
Hub and Spoke: According to a recent survey conducted among officer occupiers and real estate executives by Savills India, 75% of the respondents said that more than 20% of the workforce is expected to work from a non-office location in the near to medium-term. Organizations have begun to experiment with the Hub and Spoke model where the Hub is near the city’s centre and spokes or smaller offices are spread across the city and located closer to where employees live.
Changes owing to price decrease: Across Mumbai’s prime commercial office hubs like Bandra Kurla Complex (BKC), Lower Parel, and Andheri-Kurla Road, vacancies have inched up in the last one year as companies adopt work from home or work from anywhere. Vacancy in Lower Parel is now around 22% while in BKC, it hovers around 24%. This has led to rentals getting more competitive and affordable for certain set of companies to enter these markets.
We are seeing some small to mid-sized leasing deals being signed at attractive rates in these markets. Smart occupiers are using this window to buy or lease at prime locations across the city. Driven by these rental benefits, a new order of occupiers with different needs could enter these markets.
These could be businesses that were not able to pay premium rentals commanded by these markets in the past, but now with lower rentals, they could take up office space and lock these lower rents for several years to come. This could potentially open up avenues for companies to set up their base in premium locations that were otherwise considered financially unviable.
In a way, companies that are in Lower Parel today can either remain there and save rents by renewing at lower prices; or for a small premium, they can relocate to the new CBD in BKC. And to offset the premium, they may take a smaller office. Several organizations are experimenting with a lower footprint of the office but with more collaborative and social spaces as compared to pre-pandemic offices; these offices typically also have hot desking, with no fixed seating, thereby further increasing the ‘usability’ and efficiency of offices.
And companies that are evaluating taking up offices for back-of-the-house work can now evaluate Andheri-Kurla Road instead of Thane or Navi Mumbai. And in turn Thane and Navi Mumbai could attract business process outsourcing and contact centres which are highly cost-conscious owing to thin margins in their businesses.
In a way, prime office complexes could now bring in opportunities to a whole new spectrum of office occupier segments that have thrived mostly in suburbs due to the price benefits in those places.
Metro connectivity: There are 14 metro lines that are planned across the length and importantly breadth of Mumbai, covering a total length of about 347 KM. Of these, one line is operational and eight are currently under construction while 5 are approved but construction hasn’t been initiated.
It is expected that two of these lines will get operational in October 2022 and rest in 2023 and beyond. Given Mumbai is spread far and wide, we anticipate that the metro will reignite faster connectivity in the larger Mumbai Metropolitan Region. What this will also do is that it will throw up interesting dynamics for the office sector in terms of location preferences of corporates, especially in these times when employee well-being including travel time is gaining increased importance.
Repurposing of office buildings
Along with the rejig in commercial hubs, office buildings could potentially get repurposed as well. With vacancy levels shooting up, developers are relooking at how spaces can be utilized as a mix of leisure and commercial space. Repurposing and mixed-usage of buildings is already seen in other parts of Asia, where a few lower floors are utilized for retail outlets which have more open spaces, other floors are used for office spaces and co-working or flex spaces, and upper floors in many instances are hotels as well.
In a similar fashion, spaces in Mumbai’s office districts could also be repurposed as retail, hotels and family entertainment centres. And for developments in the peripheral areas, one of the repurposed usage could potentially be data centres. Though all of these would be more applicable for developments in the planning stage as against ready buildings.
Rise of co-working operators in office markets
Several office occupiers’ leases have come to an end in the last one year; and today, since flexibility is a high priority, co-working and managed offices are being evaluated very seriously while coworking players are also evolving.
Operators of co-working or flex offices offer a high level of flexibility across the city and even throughout the country. Many operators have created networks in other cities to offer a wider range of centers for their client-occupiers. Office seat occupancies are now available as subscriptions and day passes instead of long-term leases.
Co-working spaces have continued to be a promising asset class across the city even as overall office leasing has witnessed low activity. As occupiers continue to relook at their real estate strategy, some companies are exploring co-working spaces given the zero capital investment and high flexibility.
We have seen occupiers starting with a few seats and then ramping up the number of seats as employees start utilizing on-demand workspaces. We anticipate growing co-working and flexible office space demand and office owners opening up their vacant spaces to shared office space providers.
The last one year has been an active year for the co-working industry in Mumbai. Awfis, one of the leading players in the segment has taken up five centers adding more than 150,000 sq ft to their Mumbai portfolio, Inspire Co Spaces, another up and coming coworking operator that started in the midst of the pandemic has taken up four centres in Mumbai adding-up about 100,000 sq ft and have also initiated a network alliance with other operators in various parts of India; whereas Cowrks, RMZ’s serviced office play, was acquired by Brookfield Asset Management as a part of its acquisition of RMZ’s office portfolio.
With the office sector opening up to new possibilities, and new trends getting established, 2021 is going to be about embracing opportunities and staying resilient in the face of uncertainty. Change has always been a constant, but it is now more rapid than ever before; businesses and professionals that can unlearn and adapt to change faster will emerge stronger!The author is managing director, Mumbai & Head - Cross Border Tenant Advisory, Savills India