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Photo: Abhijit Bhatlekar/Mint
Photo: Abhijit Bhatlekar/Mint

Covid-19 Impact: Commercial office sector growth hits pause

  • The boom in commercial office space, despite the prolonged slowdown in the residential sector, was led by huge demand, global investments
  • Global firms may rework their plans, leading to postponement of leasing decisions as well as renegotiation of rentals

BENGALURU: After a seven-year bull run, India’s commercial office sector has taken a hit and suggests a slow down due to the impact of the covid-19 outbreak and the consequent lockdown that has mandated people to work from home.

The boom in commercial office space, despite the prolonged slowdown in the residential sector, was led by huge demand, global investments, falling vacancy rates and rising rentals. However, delays in project completion amid the lockdown and a lull in demand will create challenges in the next few months.

Also, with US and Europe hit hard by the covid-19 outbreak, global companies, which contribute a bulk of the office space demand in India, may rework their plans leading to postponement of leasing decisions as well as renegotiation of rentals with existing and new occupiers.

Bijay Agarwal, managing director (MD), Salarpuria Sattva Group, said there will be softening in office rentals in the next few quarters, though a longer-term impact is unlikely.

“Nearly 90% of the demand for our office space is from MNCs (multi-national corporations) and we expect that there may be a drop in demand as these companies may put their expansion plans on hold till things settle down," Agarwal said.

Salarpuria Sattva along with Blackstone Group Lp bought Global Village Tech Park in Bengaluru earlier this year for around 2,500 crore, in one of the largest office deals in recent times.

Besides the impact that this global crisis is likely to have on the office sector, it has also enabled work-from-home culture across the world, including India. IT companies are encouraging their employees to continue working from home for some time and industry body Nasscom feels companies must take a phased approach with 15-20% workforce initially.

“Construction delays will happen and companies or occupiers will take longer to take decisions resulting in a 20-30% drop in lease or absorption rates. However, because de-densification will be a huge thing, companies may need larger offices to accommodate their workforce," said Ramesh Nair, country head and chief executive officer (CEO), JLL India.

In an April report, Edelweiss Securities Ltd said while office developers have the benefit of long-term leases, they will have to work hard to ensure tenant retention and revenue stability, with large occupiers and small and medium enterprises (SMEs) likely to seek more favourable lease terms.

As large IT firms start opening up after more than five weeks of the lockdown, some developers are hopeful of returning to normalcy soon.

"At Embassy REIT, our teams have gone the extra mile to maintain business continuity for our 160+ occupiers, keeping the premises available for their business critical needs. Our occupiers have been able to operate their critical business infrastructure without interruption and understand their obligation to comply with the terms of their leases. Given our marquee tenant rooster, we have minimal impact on business," said an Embassy REIT spokesperson.

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