Impact of COVID-19 on the commercial real estate sector

Naveen Nandwani, MD, commercial advisory & transactions, Savills India, believes that commercial spaces will see little demand and growth for some time

Naveen Nandwani, Savills India, Commercial Spaces, Office space demand, Covid-19, Financial meltdown

The COVID-19 pandemic has thrown several unprecedented challenges across businesses. Like any other industry, commercial real estate market will also feel the impact in the short to medium term. The stringent measures to curb the spread of the pandemic has already led companies to widely adopt work from home policy. More new trends will emerge as companies conform themselves to suit the new environment. In the post COVID world, maintaining safety, health and hygiene within the office premise will hold a crucial place in workspace planning.  Despite the current crisis exposing some of the fragility and vulnerabilities of several businesses, the interesting thing is that many are stepping up their game to evolve and adapt to maintain business continuity.

Space optimisation
Social distancing is here to stay.  Contrary to the global financial meltdown, the solution for the ongoing crisis lies in social and scientific intervention. Until then, businesses are left with no choice but to adjust and prepare for the new norm. While several large corporates have already adopted agile work formats, this trend will get accelerated for practical and safety reasons.  This could lead to reduction in overall space requirements for new offices. In addition, density in offices is likely to decrease. Currently, almost all firms operate with maximum density.  In the short to medium term, offices will have to operate at 30 to 50% density to adhere to the social distancing guidelines. For instance, occupiers that had compressed their space density to 70-80 sft / person may be forced to reconsider the norm and increase the density to 100 sft / person in the long term. This could result in major de-clustering of large work-floors. However, even as work from home finds more acceptance in the corporate, it will not replace the importance and need of high quality and modern workplaces which over the years has proved to be imperative for attracting and retaining talent.

Muted office supply and demand
While it’s improbable that work from home will replace the need for office spaces, leasing volumes will take a hit in 2020 mainly due to the prolonged lockdown. The stringent nation-wide lockdown has already impacted business operations and expansion plans of several large corporates. Lack of ready supply and overall economic slowdown may even force several companies to relook at their real estate strategies in the short to medium term. 

A Savills India Research showed that impact of the pandemic on the office market across six major Indian cities in the next 12-14 months could be moderate to severe depending on how long the pandemic lasts in the country.  Leasing volumes would be significantly lower compared to 2019. Absorption was down by 30% in the first three months of the year to around 8 million sqft as compared to the year-ago period. With construction coming to a grinding halt, fresh supply of office space would be considerably delayed.  However, it is worth noting that 2019 was the best year ever in terms of leasing volumes for the country indicating a strong inherent demand for office space, especially in prime locations. Despite fear that the ongoing crisis could have an adverse impact on outsourcing to India, our initial assessment suggests that those redundancies may not be able to substitute the talents in both quality & availability this country has.

Stagnant rental growth
Demand has been outpacing supply in most key office markets across the country in the last few years.  Vacancy rates in some of the key micro-markets in the country remained extremely low.  Add to this, with fresh supply likely to see a significant delay post the lockdown, rentals may not see a significant dip. However, depending on the severity and how long the lockdown continues, office rentals in some of the key markets may see a drop of 5-10% over that of last year.  

Commitment to employee well-being
Hygiene and employee well-being will have a new meaning to companies, potentially influencing the design and orientation of the office space post-COVID era. Office buildings could make way for captive fitness areas like gym or yoga centres within the office premises rather than in shared area. There will be a renewed focus on building rating schemes such as LEED to create sustainable spaces with an emphasis on health and wellbeing. Additionally, contactless design in buildings for example lifts and doors is expected to increase.

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