New lease of life for commercial realty after third wave-induced blip

Commercial real estate spaces such as offices and malls are back in demand after a minor blip caused by the third wave of Covid-19, according to industry players and analysts. As the threat of the virus recedes due to acquired immunity and the vaccination drive, many offices are preparing to return to normalcy, although the hybrid model is here to stay, they add.

“The interest from occupiers is high to lease new and more spaces now that the pandemic is ebbing, according to government directives as well as indications from global health agencies. We expect leasing activities to rise by the end 2022 by 40-50 per cent over 2021,” says Viral Desai, executive director of transactions at Knight Frank India (KFI).

According to KFI data, the segment was already looking up in 2021 as the average monthly office space absorption in eight months of unhindered operations was around 4.7 million square feet (msf) — just a whisker away from the 5 msf mark of 2019.

“We have seen a strong uptick in leasing enquiries and site visits since the latter part of 2021 and have seen a good pick-up across all our four markets,” says Vikaash Khdloya, deputy CEO and COO of Embassy REIT.

“The January omicron wave was a short-term blip, which delayed some deal closures, but we are now seeing a resurgence of deal activity. Corporate entities are now implementing their back-to-office plans, driven also by their record hiring,” he adds.

In January 2022, the REIT increased its leasing guidance for FY22 from 400,000 sq ft to 1 msf. This was largely driven by improving business sentiments and strong leasing performance in the first nine months of the fiscal year when the company completed 700,000 sq ft of new leasing.

“In another positive, we have seen several cases of occupiers retracting their previous exit or downsize notices and a few cases where occupiers who had already exited during the pandemic looking to re-lease space with us,” says Khdloya.

Charting the middle path

An important factor in this rise in demand for office spaces is the waning of the work-from-home (WFH) narrative.

“Overwhelmingly, in our discussions with companies, it is expressed that while WFH was very effective as a business continuity measure, there are some serious downsides to it. Mostly, it restricts interactions with impending critical aspects like innovation, exploration as well as forging company culture,” says Desai of KFI.

“Additionally, top IT companies have hired close to 25 per cent of new staff, many of whom have not been to an office set-up even once since joining, which does not augur well when it comes to aspects like on-boarding, training and work-life balance,” he adds.

However, some are of the view that companies and employees — especially in the IT sector — will have to find a middle path, resulting in the rise of a hybrid model.

“The reality is that the hybrid work model is likely to dominate in the future. Implementing a hybrid work model is complex and varies according to the sector and the role. Some sectors such as IT-ITeS, e-commerce, professional services, and captives are better suited to follow the hybrid work model,” says Anuj Puri, chairman of ANAROCK Group.

“On the other hand, sectors such as healthcare and pharmaceutical, medical and telecom are less likely to implement remote working, owing to their strong dependence on the physical infrastructure and presence,” he adds.

Breaking new ground

As demand for Grade A office spaces has gone up, many builders are looking to meet it with new projects in most major cities including Bengaluru, Pune, Gurgaon and Mumbai, among others.

“We will be devolving eight projects across India this year as we expect leasing to keep improving through 2022,” says Karan Bolaria, MD and CEO of Godrej Fund Management, a private equity company focused on real estate. Not just the office spaces, new retail spaces and hotels are also getting developed and launched. For instance, last week, Embassy REIT announced the opening of the first Hilton Garden Inn Hotel in Bengaluru, which will eventually be accompanied by a state-of-the-art 60,000 sq ft convention centre, making it the largest hotel and conference complex in South India.

“We anticipate that the rate of return to work will gain momentum significantly in the coming months. The majority of tenants had scheduled their return to work, which was slowed by the third wave,” says Sriram Khattar, MD of DLF’s rental business, adding, “However, the rate of return has accelerated with the opening of schools and public transportation, as well as our implementation of international best practice for our tenants’ well-being and safety.”

In the retail segment, while demand from categories such as quick service restaurants (QSRs), supermarkets, electronics and consumer durables is expected to sustain, other categories such as fashion, apparel and beauty are likely to pick up owing to pent-up demand, according to CBRE.

“We anticipate that retailers will likely accelerate the adoption of omnichannel as lines between physical and online retail continue to blur due to a shift in shopping patterns during the pandemic and the rapid growth of e-commerce,” says Anshuman Magazine, chairman & CEO-India, South-East Asia, Middle East & Africa, CBRE. “Focusing on retail, we witnessed a strong comeback in Q4 of CY21 as retailers covered lost ground — and leasing activity grew by almost 250 per cent q-o-q to around 2.1 msf across Grade A malls and high streets,” he adds.