New Office Space Leasing Picking Up, Says Embassy Office Parks REIT

Holland: The beauty of our tenant base is that it is a largely international, largely technology-focussed companies. And of course, in this pandemic technology is the one sector across the world that has done extremely well. And our tenants are really broken into two categories — either pure-play technology, so that would be either product, or services. Product companies who are tenants of ours would be companies like Google and Facebook, services companies, Indian IT services companies or international companies like Accenture, all of their indicators are that they’ve done well through the pandemic as businesses become more technologically focused and rely on technology to continue or engage and change the way in which they do business.

For example, in the retail segment, doing omni-channel retailing, those types of tenants that we have, and the global captive tenants all relying on technology, they have performed well, and in turn, they have long-term contracts with us, whereby we continue to collect our rentals. We’ve collected over 99% in both Q1 and Q2. In addition to the quality of the tenant, it’s also about how we manage and operate the business parks, allowing them to operate, safety precautions that we put in place, and a strong tenant connect. We’re very pleased with the overall performance. That’s not to understate the challenges and the complexity that we’ve all been through over the last six months.

Holland: What’s happened today is that the corporate real estate executives of our tenants are in a phase that we call the pause and assess phase. So when Covid came, there was a pause, there was a focus on making sure that the business continuity was there, people were working from home. And they they then moved to that assessment stage, how are we going to respond as an occupier in the coming months and years? Do we need to de-densify our workspace? And therefore do we need more space? Are we going to have a more flexible working environment? And therefore, do we need to reconfigure the type of space. Now there is a pause on significant new leasing. Now we did do in second quarter, 2,10,000 square feet of new leasing. And we did that at good rents, or 7-10% above the relevant metrics. And that is significantly lower than was the case a year before in the last year. Typically, over the last five years, we’ve averaged about 1.8 million square feet of fresh leasing. So there are significantly less leasing. But the good news is that there has been a significant uptick in leasing quarter on quarter from the first quarter, which was the lockdown quarter. New leasing went up by 8% in the second quarter. So we see that as a good trend. That, in addition to the fact that we’re starting to see companies go back to the office. There’s a very significant dichotomy between the way international and domestic tenants are approaching to return back to work. We’re seeing 20-40% of employees back in the domestic companies. And we’re seeing still sub-10% with the international companies. That’s clearly linked to the experience that those international companies are having in the U.S. or in Europe and Australia, where particularly the pandemic has has taken on a second wave. Whereas here in India, since September, the numbers have been on a net decrease, and that’s to be welcomed. We hope that the trend of people moving back to the office will continue. So that leasing has slowed certainly. But we are very optimistic about the future for technology companies in India in this more technology-focussed world.

Holland: So to be to be clear, we have announced the proposed acquisition which is subject to a few issues... We like the assets a great deal for a number of reasons. The tenant base would be definitely one of them. The key tenants in that park would include international banking companies like Wells Fargo, it would include Cisco in the technology space, Sony, Eli Lilly in the pharma healthcare space. Flipkart, the Walmart-invested ecommerce company, has a significant tenant there. So there’s a good spread of different sectors. It is a 6.1-million-square feet completed, and income-producing portfolio of office plus another 3.1 million square feet of what we refer to as on campus development. We like that type of development because it’s relatively low risk. The land title is clear. The approvals are there. It’s surrounded by demand. And in fact, part of that 3.1 million square feet is a 1.1 million square feet built to suit with another global investment bank, JP Morgan.

Holland: Clearly, we’ve got a quality tenant base who have signed long-term leases with us. And they stand by those those commitments, as do we as an institutional landlord. So, I think that is the reason it translates through to high levels of collections. Yes, there were, there have been lots of conversations, but we have also kept the parks open and operational throughout this pandemic stage. And as I mentioned, domestic companies are now operating at between 20% and 40% of their headcount in many of our parks. We’re seeing some companies coming back where they bring 20% of people in on a Monday, and they do the same throughout the week, so that every employee is back in the office on any given week. So we’ve got a good trend and to be frank, the Indian office market, and these global companies are not here because of the cost of rentals but because they want the talent that is available at such scale in India, so that they can transform their businesses using technology.

Holland: Whether people look at hub and spoke as a one-off small scale office, or as is our view more likely that we will be able to offer flexibility across the city, for example, through multiple drop in offices in the north side of Bangalore at Manyata. And then if we were to proceed with the tech village acquisition, having something on the east side, something in the center, I suspect that we may with the best large scale tenants, we may move to that sort of model. We also have the model where in our large scale business parks, we like the best co-working players to have a presence in our parks because that provides that potential flexibility. And what we’ve seen over the years that the corporates who come in even if it’s with a dozen people will often end up growing with us over the years. So in our parks, we refer to it as a complete business ecosystem. We have all sorts of amenities, including co-working within the parks. And I think that flexibility of offering and diversity of offering that we give in our large scale parks is going to serve us well.

Holland: We’ve had conversations with a few tenants who are talking about doing that. As an example, I had a conversation with one U.S. tenant who was talking about, essentially, reducing the density from a current model that was at around about 100 square feet per person. They have just finished a fit out where they’re getting that to 150 square feet per person. And his comment was that they would see a target of getting it to 200 square feet per person. But let’s not forget that we’re just six months into this pandemic. I think you’ll start to see those changes in density, as you move forward over a matter of quarters and years, that when a company makes its next move, when the lease expires. That’s when often they’ll take the opportunity to reconfigure.

Holland: Well, I think this consolidation towards what we refer to as fewer larger, more institutional asset owners or developers is a trend that has been moving along for the last five plus years. So it’s not a new trend. What the pandemic will do is, it will accentuate and perhaps accelerate that trend. As developers in particular, who may not have such strong balance sheets, who may not have the scale that the top tier institutional developers have, they may struggle to continue, to compete in this more institutional, asset owning world. It’s not a new trend, it’s happened all over the world. But yes, we believe that will work in favour of our business.

Holland: We would look at other cities, in addition to Bombay, Bangalore, Pune, and NCR. So that obviously leaves Hyderabad and Chennai—the two other cities that we’ll be looking at.