The impact of the COVID-19 pandemic on the commercial real estate market became apparent in March as most businesses deferred their real estate decisions.
Net absorption of office spaces in Q1 2020 witnessed a decline of 30 percent from the peak observed in Q1 2019. IT-ITeS (56 percent), as well as co-working (13 percent) occupiers, drove leasing activity during the quarter, a report has said.
Construction activity and the process of obtaining requisite approvals from the government also slowed down at the beginning of March, in line with growing concerns of the impact of COVID-19, a report titled the India Office Market Update Q1-2020 by JLL said.
New completions were recorded at 8.6 mn sq ft in the first quarter of 2020, a 40 percent drop as compared to the same period last year, the report said.
Over the next few months, leasing is expected to be mainly driven by renewals and consolidation activity. With fresh take up of spaces likely to be limited, landlords might have to sit on locked-in capital or completed buildings for a relatively long time period, the report said.
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, it said.
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, the report noted.
“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. With 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 long time period,” he added
Net absorption to be a challenge
The three larger markets of Bengaluru, Mumbai and Delhi NCR accounted for nearly 75 percent 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.
However, the global health crisis arrested the growth of the Hyderabad market with limited relevant supply coming into the market, declining by 78 percent in net absorption in the first quarter of 2020 year-on-year. Resultantly, Hyderabad’s contribution to overall net absorption fell from 29 percent in Q1 2019 to 11 percent in Q1 2020, the report said.
“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. New completions also saw a fall of 40% y-o-y during Q1 2020. Several office assets in the final stages of completion were stuck owing to delays in obtaining requisite approvals from the government authorities,” said Samantak Das, executive director and head of Research, REIS, JLL.
IT-ITeS occupiers drove the pre-commitment activity across most of the major office markets in India. These occupiers require larger floor plates and pre-commitment becomes a necessity in markets with very limited availability of Grade A office spaces.
New completions take a hit with delay in obtaining approvals
New completions were recorded at 8.6 mn sq ft in Q1 2020, a fall of 40 percent YoY from levels observed in Q1 2019 and representing the second largest dip witnessed in new completions in the last five years. Post demonetisation, new completions dropped to less than 20 percent of that seen in Q1 2016.
In sync with net absorption, Bengaluru accounted for a major chunk of the new completions in Q1 2020. The Delhi NCR market, which gained steam in Q4 2019, witnessed a fall of 44 percent in new completions YoY. Hyderabad’s rise in the office market was also paused with new completions in Q1 2020 decreasing by 68 percent YoY.
Even though Mumbai witnessed new completions of 0.84 mn sq ft in Q1 2020, supply of commercial Grade A office spaces in primary submarkets remained constrained, the report said.
Vacancy levels remain range-bound across markets: Vacancy levels came down to 12.8 percent in Q1 2020 from 13.3 percent in Q1 2019. Cities like Bengaluru (5.6 percent), Hyderabad (7.7 percent), Chennai (8.0 percent) and Pune (5.5 percent) continued to hover at single-digit vacancies. Bigger markets such as Mumbai and Delhi NCR recorded vacancy levels of 12.7 percent and 27.2 percent, respectively, the report said.