New Commercial Leasing Activity May Be Hit By The Second Wave Of COVID-19 Pandemic

Google may have globally saved a billion dollars by exiting office spaces and cutting down travel of employees with the focus being on work-from-home, but it also plans to return to office later this year. A report by Bloomberg, quoted its Chief Financial Officer Ruth Porat as saying that the company is planning a ‘hybrid’ model, spacing staff less densely than before and that it will continue to invest in its real estate across the globe.

Real estate experts told Moneycontrol that the second wave of the pandemic may delay the recovery of new commercial leasing activity. The share of employees continuing to work-from-home may remain elevated in the near term, owing to the health risks. But, this is not expected to be a permanent strategy. The key here is that potential commercial leasing transactions may get further ‘deferred’ and that work-from-home is not a “business exigency but a health emergency.”

As far as Google’s footprint in India is concerned, just before the first lockdown in March 2020, the company leased 700,000 sq ft of office space in Gurgaon from Vatika Group in its under-construction building One on One on National Highway 8. Real estate broking agencies said that these plans remain on track. Moneycontrol reached out to Google but there was no response.

Brokers also said that the company had signed up for 450,000 sq ft office space in Intellion Edge in Gurgaon, owned by Tata Realty and Infrastructure Ltd (TRIL). The company currently has four offices in India, including its country headquarters in Hyderabad.

In January this year, Microsoft opened its new office in Noida that has been inspired by the Taj Mahal. The office is spread across top three floors of a six-storey building in Noida and is called the Microsoft India Development Center (IDC). The first IDC campus opened in Hyderabad in 1998 followed by one more in Bengaluru. Sources told Moneycontrol that Microsoft, HP and Airbus have no plans of cutting down on commercial real estate plans.

“Several corporates have moved to the work-from-home model but that is only for the short term. Also, it’s only operations that are in the WFH mode, not expansion plans. All firms who had expansion plans for 2025 or 2030 are continuing to lease new office spaces and getting a good deal for it in the present circumstances,” Gurpreet Ratra, Executive Director, T and T Realty Services, a real estate consultancy firm based in Gurugram, told Moneycontrol.

As a matter of fact, if a company had negotiated office space at a rent of Rs 151 per sq ft, during the pandemic they have managed to renegotiate the same space at Rs 118 per sq ft, he explains. It’s all a matter of how smart you can get across a negotiating table. Some domestic IT firms who had been paying a rent of Rs 90 per sq ft in areas such as Golf course Extension Road or Cyber Hub, have now managed to negotiate rentals for a larger space at half the price just a few kilometres away in areas such as Sohna Road or MG Road. They have also managed to convince the landlord to execute the fit-outs for them. There are others who have struck deals to include maintenance waivers and extra parking slots.

Another trend doing the rounds is that of a telescopic rent agreement wherein a company agrees to a nine-year commercial lease, paying a rent of Rs 70 per sq ft for the first year, Rs 80 for the second year and Rs 100 from the third year onwards, he says. Overall, rents are expected to remain stagnant at least for a quarter and it will depend on the tenant on how well he can renegotiate a deal during the second wave of COVID-19.

Bhupindra Singh, managing director, Regional Tenant Representation, India, Colliers told Moneycontrol that large corporates are not exiting from physical workspaces, “they are largely maintaining their footprint and work-from-home is not a permanent strategy,” he says.  Companies are only in a wait and watch mode. The mindset is to reduce office expenses and hence attempting to renegotiate at a few rupees lower.

Having said that, there are several small and medium size companies, whose leases were to expire now, are going in for a short term extensions. “Commercial rents may seem soft today but the situation may not persist once demand returns,” he adds. However, larger organisations continue to go in for long-term commitments.

Real estate experts say that the big corporates continue to expand their office footprints at alternate locations where the commercial rentals are less and infrastructure is better. Large consulting firms have taken up space in Noida during the pandemic.

More companies may also adopt a hybrid working model and include co-working spaces to give employees some flexibility. As corporate occupiers remain uncertain about long-term office leasing plans in 2021 and 2022 and are still re-assessing their office space needs, they are exploring leasing desks in flexible workspaces to avoid long-term capital expenditures, and to get more flexibility on their lease terms, a report by Colliers said.

An analysis by ICICI Securities also said that the Indian Commercial Real Estate (CRE) office market has seen a 47% YoY decline in Q1CY21 (Jan-Mar’21) net absorption at 3.6msf. While green shoots were emerging in Jan’21 with a pick-up in leasing enquiries and large pre-leasing transactions, the second Covid wave in India may lead to a delayed recovery for the office market. “We now expect leasing pickup towards the end of Sep’21 vs. Jul’21 earlier and the current trend of occupiers downsizing and delaying new leasing decisions to continue in the near-term.”

It said that it remained positive about the long-term resilience of the Indian office market, with a limited number of 8-10 large pan-India office developers, India having affordable rentals of under $1 psf/month and an abundance of STEM talent (Science, Technology, Engineering, Mathematics) for technology assignments with over 2 million students graduating each year.

ICRA also said the second wave of the pandemic may delay the recovery in new leasing activity. The share of employees continuing to work-from-home may remain elevated in the near term, owing to the health risks. “Without immediate visibility on larger number of employees returning to offices, potential leasing transactions may get further deferred,” it said.

Earlier, declining infections along with vaccination was expected to speed up normal attendance at offices, which would have increased leasing transactions. Ramnath Krishnan, President Ratings, ICRA Ltd: “In line with the rebound in economic growth, the credit ratio (ratio of upgrades to downgrades) had recorded an improvement after November 2020. With the fresh uncertainties wrought by the second wave of the pandemic, and the likelihood of additional support measures being limited, the credit ratio is now likely to stall. The pace of recovery would undoubtedly be arrested by the recent surge in Covid-19 infections and associated localised restrictions. The extent of the impact would take a cue from the timelines with which this spike plateaus, and then starts receding.”

While the vaccination drive has commenced, the pace of the actual roll-out of the Covid-19 vaccines to the wider adult population, introduction of additional vaccines in the Indian market, their efficacy against different variants, and the duration for which the vaccines provide enhanced immunity will also impact sentiment and growth, going forward, he said.

“Nevertheless, we estimate the impact of the second wave of the pandemic on many sectors to be lower than the first – an advantage from the less widespread and stringent lockdowns as of now (vis-à-vis the prolonged nationwide lockdown last year). Other supportive factors include lower global disruptions, absence of pricing pressures on commodity producers, increased digitisation and availability of additional funding lines,” he added.

The second wave will also impact the institutional flow of funds into commercial real estate. This will result in the overall sentiment in commercial office space being relatively muted, Samantak Das, Chief Economist and Head Research & REIS, JLL told Moneycontrol.

Considering the current situation, the overall commercial net absorption figures is expected to be 25 mn sq ft to 28 mn sq ft in 2021, down from earlier expectations of 30 mn sq ft to 32 mn sq ft in 2021. Therefore, there will be a definitive impact of this resurgence, Das said.

(Source: Moneycontrol)