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Despite the destruction caused by the pandemic, there is still hope for the real estate stakeholders. The lockdown introduced in March 2020 has resulted in several companies shifting from the traditional office structure to a virtual office structure. As work from home has become the new normal, the demand for office spaces and commercial real estate saw a dip. The net leasing activities also faced a decline as this new trend has highly impacted corporates’ leasing decisions.
However, a recent study conducted by a leading analytical company has shown a 12-18% growth in demand for office spaces in the next fiscal. The development is expected to ride on factors such as the current fiscal, gradual return of tenants to offices, and improvement in the macroeconomic situation.
Net Leasing Activities: 2018-2021
The net leasing activities in the commercial office spaces, between 2018 and 2020, have shown a healthy compound of annual growth rate (CAGR) of 15-20%. Cities such as Hyderabad, NCR, and MMR accounted for the highest CAGR. One of the driving forces for this development in the past few years is the healthy addition to the employees’ list in IT or ITeS and BFSI. There has been a 6-7% CAGR in the past 3-4 years resulting out of the same.
This increased net leasing trend had reversed when the pandemic struck it as it brought in demand destruction and uncertainty. Most of the companies adopted the ‘work from home’ trend, which further reduced demand for office spaces. The employee addition made between April to December 2020 was just 80,000, which is less than the previous years, which recorded around two lakh employment opportunities. This has also partially restricted incremental leasing. Certain few large deals, especially in the e-commerce, BFSI, and technology sectors, have supported Bengaluru and Hyderabad’s leasing activities. Considering all the factors, an estimated decline of 35-45% on-year this fiscal to 20-25 sq. ft. in the top six cities.
The rating by the leading analytical company has analyzed the market by taking into consideration marquee names and assets under various REITs. The study reported that the sample’s occupancy levels had decreased marginally from 93.7% to 92.2% by September 2020. The study also recorded that the rental rates are below the market rental rates for 90% of the tenant’s population. Thus the pandemic has not led to a complete downward revision in rental activities.
Around 3-4 of the leased areas are now occupied by tenants operating in industries with minimal impact of the pandemic, such as the IT or BFSI sectors. These are also sectors with high financial strengths. Further, the substantial investments made in fit-outs and high market rental have deterred or stopped the tenants from vacating their existing lease. However, 5-7% of the tenants operating in the retail and start-up sector are at the risk of vacating as the pandemic has caused stress on their business.
Bottom Line
The pandemic has affected commercial activities largely. The lockdown imposed has also led to people working comfortably from their homes. This has led to a decrease in demand for new office space in the year 2020. Several real estate surveys have also recorded that the pandemic has only affected the demand for new office spaces and not those already under net lease as the cost deters people they incurred due to fit-outs. A recent study has also stated that the demand for office space for net leasing activities is expected to increase by 12-18% in the next fiscal year in the on-going year, owing to several reasons mentioned earlier.
Assetmonk is an online investment platform offering commercial and residential properties in local markets with global trends such as Bangalore, Chennai, and Hyderabad. Assetmonk offers several investment opportunities that have been categorized as Growth, Growth plus, and yield properties. Visit our website or contact us for more details on investments in the commercial real estate sector.
Increasing demand for commercial Office spaces FAQs:
What drives demand for office space?
Some of the main factors that drive the demand for office space include Flexibility, Activity-Based Workplaces, Amenities, Maintenance and Operations, Urban, Downtown Locations, etc.
Is office space a good investment?
Investing in office space can be a good option if you are looking forward to diversifying your investment portfolio. It is capable of earning you returns in the form of capital appreciation and rental income.
What should I look for in an office space?
Some of the key factors that you should consider while buying an office space include location and accessibility, space, price, company size, technology and infrastructure, layout and design, contingency plan, etc.
How can I promote my office space for rent?
The first step is to do your homework and carry out proper market research. The second step is to include Keywords in Your Commercial Space Renting Ad and provide online reviews of the office space as customers are driven by factors such as these. It is recommended that you use digital advertising platforms cautiously and use local images and videos when you are sharing. Some of the other tips include interviewing your potential local customers, using social media platforms to the fullest. You may also use paid advertising Media to promote your office space.
Is it better to buy or rent office space?
Buying is a better investment than renting. It gives you the benefits of capital appreciation and returns on the property’s sale in the future. However, it is recommended that you rent out space in case of financial limitations.
