WFH impact: Lower rents for office space likely

While last year was a record year for commercial space developers, with an absorption of 60 million square feet, the present one is for reduced rentals, new projects being deferred, and emergence of new office tenants.

As IT majors go for a workfrom-home model for a significant number of employees, fresh take up of office space could be low, said experts.

They said the only exceptions may be e-commerce players and those dealing in essential products and their supply chain. In recent times, players like Amazon and other aggregators have hired thousands of additional workers on account of growth in demand.

Cavinkare, an FMCG company, would also be leasing out its headquarters after having moved most of its workers to the work-from-home mode. IBM India was reported to be cutting back exponentially on its office space. The company clarified that while some leases were coming to an end, it continually looked at how its real estate needs served its employees and clients.

“Rentals will correct but how much only time will tell,” said Ramesh Nair, chief executive at property consultant JLL.

Cushman & Wakefield has projected that office rents will fall 5-10 per cent on lower demand for space from corporates because of the pandemic.

“The outbreak of Covid-19 will have a short-term impact on the office market, with demand likely to fall 45 per cent,” said Anshul Jain, MD, Cushman & Wakefield.

Ashok Kumar, MD and chief executive at real estate advisory Gennex Partners, said: “We have seen two clients terminating their lease agreements and a couple of them consolidating.” Most MNCS are reviewing their realty strategy as they realised that safety aside, many services can be delivered from home while time is saved and productivity is maintained, he said.

There are also reports of large tech firms looking at downsizing office space. There will also be a hit on commercial realty due to work from home. “Our estimate is that 15 per cent of the workforce may be able to permanently work from home. However, that will get offset by de-densification of offices,” said Sahil Vora, founder of real estate services firm Sila. “Years 2020 and 2021 will be challenging and absorption may be 30-40 per cent lower than 2019, coupled with rental yield and collection pressure.”

Large office developers are not giving in, said Raj Menda, chairman of RMZ. He said tenants have asked for reductions, but the company isn’t going to lower rates. “Deals (rental), where inspections were scheduled for March and April, have not happened. Such deals have now been deferred,” he said. Rents may just hold strong, if demand and supply levels don’t see too much of an imbalance.

“If there is a supply of 40 million square feet this year. and demand comes only for 20 million square feet, then rents will crash. If developers do not build much and there is corresponding demand, rents will hold,” said Anuj Puri, chairman, Anarock Property Consultants.

Referring to huge job losses in the US, Samir Saran, managing partner with Sotheby’s Realty, said: “As US firms constitute a large part of the Grade A commercial property tenant profile in India, this will have a knock-on effect in the sector.”

Saran said the rising cost of maintenance to adapt to the ‘new normal’ will hike costs as landlords and tenants will have to reimagine office spaces. “This will increase operational costs,” he said.