How Will Commercial Real Estate Tide Over The Challenges Posed By COVID-19

India’s commercial real estate (CRE) market has grown in strength in the past decade or so. Robust occupier interest, the rise of organised real estate developers, and the entry of institutional capital have acted as catalysts for the growth in CRE. Strong interest from sectors such as technology, banking, financial services, research, and consulting coupled with operators providing flexible space resulted in a sustained annual growth in office absorption. In 2019, gross office space absorption crossed the 60 million sq ft mark for the first time ever and touched a historic high of 63.5 million sq ft, registering a growth of almost 30 percent compared to 2018. Office stock across seven leading cities crossed 640 million sq ft and it is expected to cross 660 million sq. ft. by the end of this year.

Most occupiers either plan to or have already established collaborative technology platforms, like providing video-conferencing tools or improving VPN, to accommodate remote working during the coronavirus pandemic. Occupiers are likely to emphasise on employee safety and business continuity. They will take up short-term measures to adhere to social distancing norms, such as those prescribed by the World Health Organization, while commencing operations. These measures will include phased reopening, rotational workforce, sanitation, and plotting commuting routes in offices. Occupiers are likely to adhere to government regulations on social distancing, using a reduced workforce as operations commence in a phased manner.

The office after coronavirus

They are expected to focus on the distribution of core and flexible spaces in their premises and some might even want satellite offices or use a temporary hub, aiming to lower their capex and improve agility. Occupiers will take time to decide on long-term changes to workspace design such as the use of collaborative spaces, or using hot seats.

Developers might look at securing their entire assets, including completed properties and those under construction, by following strict sanitisation measures. Completing projects will take longer as the coronavirus pandemic has affected the labour market and there are strict sanitisation norms for work. Delays may also arise due to unavailability of imported construction materials and equipment in the short term. Developers are expected to have strategies to handle future outbreaks of the coronavirus disease in an individual building in a business park. It is anticipated that the measures they would undertake to combat the disease, like sanitisation and employee safety, would be linked to branding of their assets.

As diligence for the disease takes centerstage, developers and investors will also increasingly focus on making their portfolios resilient against not just environmental shocks but also pandemics. It is expected that “pandemic clauses” would be a part of all building resilience strategies in the coming future.

Most investors have keep commitments they made before the disease’s outbreak, as they step up due diligence of projects and developers. Investors will continue to collaborate closely with developers to ensure an effective implementation of sanitisation, security, wellness, sustainability and other preventive norms. Global investors would in fact implement lessons learnt from other markets to ensure a standardisation of measures across assets worldwide.

Commercial real estate is resilient

The appetite for sustainable commercial real estate is expected to strengthen, especially for those looking at more stable rental revenues. Traction from private equity capital, especially in core assets, will strengthen further due to volatility in other segments. We also expect real estate investment trusts (REIT) to continue to gain traction, even though there will be greater scrutiny on quality of assets, sustainability elements and portfolio resilience.

While the commercial real estate market in India is evolving and the dynamics of the industry are changing rapidly, there is a need for corporate occupiers to plan for the future. Reopening of workplaces will require a clear focus on employee safety, sanitisation, technology, and restructuring among other changes. This may add to operational expenditure, but it will ensure that occupiers are prepared for disruptions.

Working from home run was a reaction to the nationwide lockdown to contain the coronavirus outbreak and it is unlikely to become a permanent concept in real estate strategies. This is due to challenges such as psychological impact on employees, data security, and monitoring productivity.

We expect demand for commercial real estate to remain robust and the sector to emerge resilient and inevitably reinvent itself.

(Source: Business Line)