Office market across seven major cities remained resilient in the first quarter of 2020, despite a challenging global economic climate. Over the few months fresh take up activity will take a back seat.
By Varun Singh
Approximately 52-mn sq ft of Grade A office space was completed and more than 46 mn sq ft absorbed in 2019. However, Q1 witnessed a dip and fresh occupation of offices will take a back seat.
According to a report by JLL India, office assets offered high growth and stable returns. Investors, domestic and foreign alike chased investment ready commercial assets and development opportunities in top cities.
However, the impact of the COVID-19 pandemic became more apparent in March as most businesses defer their real estate decisions. Net absorption of office spaces in Q1 2020 witnessed a decline of 30% from the peak observed in Q1 2019.
“New completions were recorded at 8.6 mn sq ft in the first quarter of 2020, a 40% drop as compared to the same period last year,” adds the report.
“The evolving COVID-19 crisis is prompting corporates to re-evaluate their commercial
real estate strategies, with a focus on enhancing resilience measures. There will be a
greater emphasis on cost management, employee wellbeing and sustainability, and the
adoption of flexible working practices as resilience practices ramp up,” said Ramesh
Nair, CEO & Country Head, JLL.
Over the next few months, leasing is expected to be mainly driven by renewals and consolidation activity. Fresh take up of spaces likely to be limited over the next couple of months, landlords might have to sit on locked in capital (completed buildings) for a relatively longer time period.
The three larger markets of Bengaluru, Mumbai and Delhi NCR accounted for nearly 75% of the net absorption in Q1 2020, despite the overall decline in the overall market.
Net absorption in Mumbai and Chennai more than doubled in Q1 2020 as compared to Q1 2019, led by strong leasing activity in the first two months by IT/ITeS occupiers.
“The strong leasing momentum of 2019 continued in the first two months of 2020 before the pandemic impacted the Indian market in March. Several leasing deals in the final stages of negotiation were deferred as the office market witnessed a net absorption decline of 30% y-o-y,” said Samantak Das, Executive Director and Head of Research, REIS, JLL.
Office absorption in Q1 2020 was backed by strong pre-commitment levels in new completions during the quarter. The quarter witnessed a net absorption of 8.6 mn sq ft of Grade A office space, out of which pre-commitments accounted for 4.9 mn sq ft.
Occupiers have also begun renegotiating their lease contracts for lower rents, an extension of rent-free period as well as waiver of lock-in periods. Short-term liquidity concerns might arise for developers/landlords with occupiers seeking concessions.
Co-working operators, who are more exposed to short-term contracts, may face greater problems if members decide not to renew, while operators with more secured medium-term and long-term contracts will be less exposed.
Business continuity plans and remote working strategies have been successful. Hence, future demand from occupiers is likely to take into account the need for flexible workspace.