As the third wave of covid-19 recedes, a deeply scarred office real estate sector comes into view. However, business normalcy is returning, with companies gradually bringing employees back to offices, which is a good sign for commercial real estate.
The work-from-home model adopted during the pandemic outbreak led to a jump in vacancy levels at office spaces, with companies either delaying their re-leasing decisions or prematurely exiting rental agreements. Take a look at the chart alongside. Property consultant Knight Frank India’s data shows that vacancy levels at office spaces among top Indian cities were elevated at 17.2% in the December quarter of 2021. This is a slight moderation from 17.4% in the September quarter of CY21, but still significantly higher than 13.2% in the March quarter of CY20.
Analysts reckon the pace of recovery in office space demand, fall in vacancies and improvement in rentals depend on the extent of office lease agreements getting renewed. There is some good news on this front.
“IT companies still hold the lion’s share in overall office leasing space, and the demand outlook there is robust. They are not only on a hiring spree but are also calling their employees back to work. Even though there may still be some element of a working-from-home, on a net basis, these are positives for the Indian commercial real estate. So, we expect re-leasing activity to pick up and rentals to improve gradually," said a real estate analyst with a domestic brokerage house, requesting anonymity.
While the Indian real estate sector is highly fragmented, management commentaries of three real estate investment trusts (Reits) listed on the stock exchanges offer some insight into the lease expiry, renewal and exit trends. For instance, the Embassy Office Parks REIT has total lease expiries of 1.9 million sq ft (msf) in FY22, of which 0.5 msf has been renewed in 9MFY22. For Mindspace Business Parks REIT, out of total portfolio expiries of 2.5 msf in FY22, it has been able to re-lease 1.1 msf in 9MFY22. In FY23, the area scheduled for expiry stands at 1.1 msf for Mindspace. The Brookfield India REIT has seen overall portfolio exits of 0.8 msf in 9MFY22. For Q4FY22, the Brookfield REIT has balance expiries of 0.30 msf. The top clients of these Reits are global IT companies such as Accenture and WNS.
“True, there is some uncertainty with the ongoing Russia-Ukraine conflict, which could weigh on business decisions. But overall, we expect office leasing to increase from 38.5 million sq. ft in calendar year 2021 to 45 million sq. ft in calendar year 2022. As for rentals, at an all-India level, they should improve by 5-7% going ahead," said Viral Desai, executive director, transactions, Knight Frank India.
Apart from the IT and ITES sector, the e-commerce and startup sector is a new demand driver for office space. A recent study by investment management company Colliers and real estate agency CBRE Matrix showed that startups are expected to lease about 29 million sq. ft over 2022-2024, a 1.3 times increase from the 2019-2021 period. Their share in office leasing is anticipated to rise from a mere 2% in 2010 to 13% by 2024.
Anshuman Magazine, chairman and chief executive officer- India, South-East Asia, Middle East & Africa, CBRE, expects an improvement in occupancy rates to exert downward pressure on vacancies in the months to come. Annually, he expects gross absorptions of office spaces to increase by about 10-15%.
To be sure, notwithstanding the green shoots, it may take a while to reach pre-covid vacancy levels even as the return-to-office trend is gaining momentum.
