How Covid-19 would impact CRE in the months to come

How Covid-19 would impact CRE in the months to come

A few notable trends likely to emerge amidst the current COVID-19 situation

Delays in construction activities to impact supply
The office segment has been growing at an impressive rate over the last three years. The supply has been on the rise each year and the absorption has also been good. Based on the trends, it was estimated that the supply would have been around 47m.sq-ft in 2020. This would have been the highest supply infusion in the decade.

Projects that have significant levels of preleases and are nearing completion may get delayed by a quarter or two but are likely to be ready for fit-outs by this year end. Some developments that are still to secure leases and commitments from occupiers may get spilled over to the next year as some developers may not be willing to pay out large fee for Occupancy Certificates (OC) if majority of their projects’ space is not leased. However, owing to the prevailing crisis, the supply is surely going to be affected. Delay in construction and absence of labour and material will result in a significant decline in supply and is estimated to be lower by 15% to 30% over Pre-Covid estimate.

Reduced demand
Amidst the pandemic and the global health crisis, the demand for office space is likely to drop. As many occupiers may not be able to assess the impact until the situation is resolved, they will reassess their position. While there will be some significant slowdown in their businesses, the expansion or consolidation plans may also be shelved. ANAROCK Research examines the situation in the light of previous impacts of economic slowdown and the global economic crisis. Net absorptions in 2020 to drop by 17% to 34% from the Pre COVID-19 estimates.

The U.S. headquartered companies lease typically lease between 40%-50% of annual net offtake of office space in India. Given the high chance of USA economy suffering due to COVID-19 impact, its negative effect will be felt in India with a drop-in office space leasing. European Union (EU) headquartered companies do not influence India’s annual office space offtake as much as their contribution typically hovers around 10%-12%, but much of that is going to evaporate given the very high adverse impact of COVID-19 in Western and Southern Europe and in the UK. Given the sluggish business environment and that is likely to be prevalent post the COVID-19 outbreak period, it will put rentals under tremendous pressure. While we expect that the vacancies may not rise significantly owing to the supply-demand equilibrium, the occupiers would like to re-negotiate the cost and other terms.

Rentals to come under pressure

As most corporate occupiers in Indian office space are MNCs in the IT-ITeS sector, which are headquartered in Europe or the U.S., they are likely to revisit their business plans for the coming years. ANAROCK analysis further indicates that US-based companies account for 45% occupiers, followed by India-based companies at 30%. Incidentally, countries within the European Union – one of the worst affected - contribute 10% of the overall leasing in the Indian office market. However, the current testing time will compel many Indian operators to explore various options that can be leveraged in the future to optimize cost.

Given the present situation, if the U.S. is able to arrest the spread of the pandemic and capable of preventing the economic contraction, the demand for corporate spaces may remain intact. The economy of the countries in the Euro Zone are severely impacted and are likely to contract post the COVID-19. Large leases, renewals and commitments are likely to be affected causing rentals and renewals to be negotiated. Large occupiers who have not been able to operate to their full strength during the pandemic may factor this period while renewing and would negotiate the rentals. Consolidation plans may be to move to peripheral locations to contain the rental pay-outs. In our opinion, rentals are likely to come under pressure, as renewals and new leases are likely to be negotiated intensely.

Demand for flexible spaces on the rise; relook at office space requirement
Layout of workstations and production areas may be revisited to optimise real estate requirements basis a new work schedule and regime. Occupiers may consider flexible working schedules based on rostered days of works; thereby reducing the space requirement resulting in reduced operations cost. Tele commuting and rostered timings may become the new norm for offices depending on the nature of business. While all occupiers may not change, there will be many that will prefer technology enablement and flexible schedules to optimise cost. According to Global Workplace Analytics, employers can save over USD 11,000 per halftime telecommuter per year. Having experienced telecommuting during the COVID-19 pandemic, many companies may consider this as a longterm strategy, which will result in optimizing their real estate requirement and operations cost.

COVID-19 pandemic has disrupted office segment which was on a growth trajectory for the last three years. The incident will open new business models which makes the players more reliant on technology for ensuring business continuity. However, the massive construction activities that are currently underway in India and other emerging economies face uncertainty. The corporate world may be forced to revisit their requirements keeping personal health and hygiene as the topmost priority for their assets and employees.

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