Net leasing of commercial office space will reach 90-95% of the pre-pandemic level next fiscal, up from an estimated 70-75% in the current one, with return to office gathering steam and new hiring picking up strongly. This, along with steady rental collections, which had not fallen significantly, will ensure the credit profiles of commercial real estate owners remain ‘stable’, a CRISIL Ratings estimate shows.
Net leasing had taken a massive hit during the last fiscal, almost halving to 20 million square feet (msf) as absorption of new spaces was tepid and some tenants even vacated office premises.
Leasing remained modest in the first half of this fiscal, too. With supply exceeding demand, market occupancy reduced to 85% in September 2021, from the pre-pandemic mark of 89% in March 2020. That said, leasing activity is expected to pick up from the fourth quarter of this fiscal and occupancy to improve to 87% next fiscal, closing in on the pre-pandemic level. Says Anand Kulkarni, Director, CRISIL Ratings, “A gradual return to office and strong hiring in key sectors such as information technology (IT) and IT-enabled services (ITeS) will catalyse office demand. Based on an analysis of 10 large IT/ITES companies3, CRISIL Ratings expects net employee addition to grow ~40% this fiscal compared with ~10% growth last fiscal. This will drive a reversal of the decline in office occupancy during the pandemic, even as most offices adopt a hybrid working model4.”
While the hybrid working model is here to stay, corporates are still evaluating logistical challenges and working on optimal solutions. CRISIL Ratings estimates that a hybrid working model, with up to 25% of the workforce having flexibility to work from home, could reduce demand equivalent of 12-15 months. However, the entire loss may not be permanent and could be recouped in the next few years as people gain confidence in working from office.
Says Kshitij Jain, Associate Director, CRISIL Ratings, “Credit profile of the CRISIL Ratings portfolio should remain stable considering the low leverage, strong counterparties and negligible impact on collections. We expect the average debt service coverage ratio to remain healthy at ~1.6 times in fiscal 2023, which will be a marginal improvement from ~1.5 times this fiscal, supported by the improving market scenario.”