A Potential Upturn in Commercial Space Rent Collection

Flexible work becomes viable for corporate employees post-pandemic, as companies dither on giving up office leases

A Potential Upturn in Commercial Space Rent Collection
A Potential Upturn in Commercial Space Rent Collection
Aditya Kedia - 28 June 2021

Commercial real estate has been one of the few segments that has weathered the pandemic storm quite well. The year 2021 can rightly be termed as one in which the landscape of commercial real estate will continue to develop and lead the recovery in the real estate domain. As per the latest IMF estimates, the commercial real estate domain has seen an upswing in leasing activity from 41.6 million sq ft to 58.6 million sqft at a compound annual growth rate of 12.5 per cent. Developments like the rapid pace of vaccination will bring the industry back on track. Alongside factors like the growth of rental yields due to strong occupancies, the unwillingness of corporates to give up leasing their office spaces, the development of co-working spaces has encouraged businesses to fortify their back-to-work plans. There have been many apprehensions on the demand for office space owing to the trend of work-from-home, but these advancements have put all these concerns to rest. The commercial real estate segment will be a major beneficiary of the re-opening of offices.

With the second lockdown coming to an end, the industry has been expecting a good residential and commercial real estate demand. Since investors will prefer capitalising in office spaces closer to their homes, the segment of commercial real estate will only flourish in times to come. The below-mentioned progressions in commercial rent collection are a testimony to the industry's green shoots of recovery:

Work from home is transitory: Remote working is a transient phase and cannot replace an office space. This means the city commercial climate expects the return-to-office trend to materialise once the situation comes under control. While there surely has been an encouraging upsurge in leasing inquiries, industry experts believe it will take a few more months before the industry witnesses lease conversions to return to pre-pandemic levels. The size of office space will only surge in the upcoming quarters as the workplace layout requires to change to accommodate the same number of people and abide by social distancing norms.

Diversification bid: Among all sections, residential real estate is measured to be the safest, due to its easy-to-understand market dynamics (demand-supply situation). However, those with ample experience of capitalising in residential properties must consider investing in office spaces as well. The office spaces offer a rental income of 7 to 10 per cent of the property’s value yearly. With an investment of Rs 10-50 crore, you can presume a rental yield of 9-10 per cent annually. A bigger investment (one that exceeds Rs 50 crore) can lend investors the leverage to procure a higher rental yield than this. Capital appreciation, however, is contingent upon the timing of the venture and the economic condition. Capital appreciation may be dependant more on macroeconomic and investment climate.

Companies reluctant to surrender office leases as they anticipate to reopen soon: Experts anticipate the commercial real estate sector to rebound back and report an extensive hike in rent collection in the upcoming fiscal year 2021-22. Corporates are hesitant to let go of their rented office spaces despite work from home becoming the norm while occupiers are estimating their long-term work-from-office strategies. This has been fuelling growth for the sector.

The rise of co-working spaces: Many organisations, particularly, small and medium enterprises, are finding it monetarily unwise to uphold office spaces on a long-term lease amid the pandemic. This has given rise to the emergence of flexible working trends like co-working spaces which is a viable option for filling in for various verticals that cannot work remotely. This segment has been facilitating organisations to fill the gap through hassle-free services wherein the overall expenditure for the setup is marginally lower. This is particularly true in luxury commercial real estate where there is limited space obtainability.

A more mobile workforce and predictable economic growth have been reshaping the business environment and altering the occupier approach to commercial real estate decision-making. The pandemic might push the demand for rental units in India, but whether the supply increases to meet it, despite the hurdles, remains to be seen.

The author is Managing Director, Transcon Developers

DISCLAIMER: Views expressed are the author’s own, and Outlook Money does not necessarily subscribe to them. Outlook Money shall not be responsible for any damage caused to any person/organisation directly or indirectly.

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