Home >Markets >Mark To Market >Second wave softens office leasing outlook; higher IT hiring gives hope

Demand for office spaces, which had seen some improvement of late, has fizzled out yet again. Quarterly data published by property consultancy Cushman and Wakefield showed that net absorption or net leasing in seven key cities fell to 3.57 million sq. ft in the March quarter. Compared to the year-ago period, it indicates a fall of 47%, and 44% sequentially.

Restrictions put in place by state governments to curb the second covid wave indicate that work from home is here to stay, at least for now. This is likely to further weigh on incremental demand for new office leasing contracts.

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Experts cautioned that the second wave would delay the return of people to offices. This would prompt occupiers to defer their leasing decisions.

“This is likely to be a difficult year for office leasing, given the way infections are rising. We expect rentals to come under pressure in the quarters ahead. Also, concerns of premature termination of contracts by clients is coming to the fore again," said an analyst with a domestic brokerage, requesting anonymity.

In a report dated 19 April, Edelweiss Securities Ltd analysts said absorption weakened across cities sequentially in Q1CY21, indicating the pandemic’s adverse impact. Consequently, supply declined 14% sequentially, vacancy levels inched up to 16.1%, rising 270 basis points (bps) year-on-year and 100bps quarter-on-quarter, they added. One basis point is one-hundredth of a percentage point.

“With vacancies rising, pressure on rents persisted with landlords being much more amenable to giving concessions. While around 32% of the supply in CY21 is already pre-committed, fresh leasing trajectory hinges on the pandemic’s trajectory hereon. In the near term, we believe supply will outstrip demand as the leasing trajectory continues to be in the slow lane. Consequently, vacancy levels will inch up in most cities. This will keep rents range-bound," added the Edelweiss report.

Amid this gloom, a ray of hope for the office leasing segment is emerging from the improving prospects of the Indian IT sector. The latest management commentaries by leading Indian IT services providers point to increased hiring in FY22.

For instance, Tata Consultancy Services Ltd seeks to hire around 40,000 freshers in this fiscal year, while peer Infosys Ltd is planning to recruit 26,000 freshers.

This is seen as a positive for the commercial real estate space as IT companies have been among the key demand drivers for offices in markets such as Bengaluru and Hyderabad.

This segment is estimated to have contributed an average of around 40% to overall office space demand in India over the past few years.

Further, industry experts are of the view that despite increased flexibility, companies will have to adopt de-densification measures to comply with social distancing norms.

Anarock Property Consultants anticipates an increase in per employee space requirements from 80 sq. ft during the pre-pandemic times to at least 120-130 sq. ft in a post-covid-19 set-up.

The Cushman and Wakefield report further said that flexible space leased by corporate clients increased by 58% y-o-y to 15,523 seats in Q1CY21.

Analysts said companies are increasingly adopting hybrid models, comprising flexible and upgradable workspaces, which is being seen as an affordable alternative in the current scenario and could drive office leasing demand going ahead.

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