What Work From Home Means For India’s Biggest Office Space Market

There’s no doubt that work from home threatens India’s booming office leasing market as it’s been far more successful than companies expected. Bengaluru, the backbone of India’s commercial real estate sector, faces the biggest challenge.

The only dispute is how much will work from home hurt developers. A Knight Frank survey raised alarm as it pointed to a 37% year-on-year drop—the steepest in a decade—in office transactions to 17.2 million square feet in the first half of 2020 in the top eight cities.

Office space surrendered during the period stood at 6.3 million square feet. Bengaluru alone, according to the report, accounted for more than half of it as companies looked to curtail fixed operational costs.

That led to a jump in the vacancy level in Bengaluru office market — a base for companies including Infosys Ltd., Wipro Ltd., Flipkart, Cisco, Amazon, Microsoft, and Google — from 4.8% in second half of 2019 to 6.5% as of June 2020, according to the report.

Developers in the city—called India’s Silicon Valley because of the concentration of technology companies—denied the alarming trend, saying the extent of the impact is much lower. Yet, Covid-19 disruption will force companies to look for ways to cost cuts amid a slow recovery in an economy that’s expected to contract the first time in more than four decades.

Other Key Highlights On Bengaluru

• Knight Frank said rents, growing in the past five years, stagnated since April.
• Occupiers reaching out to landlords for partial rent or maintenance cost waiver for the lockdown period.
• The first half of 2020 has recorded rent growth of 6% year-on-year.

Knight Frank has yet to respond to BloombergQuint’s emailed queries seeking detailed data on the space surrendered in Bengaluru.

Developers and property consultants BloombergQuint spoke with acknowledged the churn but disputed the extent of it.

Markets will see some cyclical corrections and the pandemic will put some pressure but the industry isn’t falling apart, said Thirumal Govindraj, MD, executive board, RMZ Corp. He also said clients may have surrendered hard option—provided when spaces are booked in under-construction properties.

“A lot of hard option space has come back to the market. So it’s not the physical space that people have actually given up,” said Govindraj.

Tenants always keep a room for head-count correction. “This is not a new phenomenon. Every year, 15-20% space comes back into the market as hard options,” he said. “Knight Frank has just taken the hard option numbers and spun it around as Covid story.”

RMZ Corp. owns office buildings in Bengaluru, Chennai, Hyderabad, Delhi-NCR, Pune and Mumbai, and counts Accenture, Google Inc., HSBC Holdings Plc., Dell, Honeywell International Inc., Morgan Stanley, Reliance Industries Ltd. and Cisco Systems Inc. among its tenants.

“If you look at my portfolio of around 17 million sq. ft., it is fully occupied. Bengaluru accounts for around 10 million sq. ft. In that 10 million sq ft, there are only two people who are going to give up space. But that space is very small measuring 10,000 and 20,000 sq ft, respectively.”

That space is already taken by a new client and by the time they exit in six months, new clients will be in, he said. “In net, there is no vacancy.”

Yet, BloombergQuint also found that discussions are on between developers and tenants on renegotiating rentals, and some of the companies are surrendering space in grade-B properties.

“The Knight Frank data on office space surrendering is actually the tip of the iceberg. There are different combinations of firms that have given up office spaces in Bengaluru. Many startups that could not sustain the pressure put on by the Covid-19 crisis, have given up their spaces. These startups mostly occupied grade-B office spaces,” said Shrini Rao, CEO-Asia Pacific at Vestian Global Workplace Services Pvt. “In grade-A office spaces, where majority of offices belong to IT and IT-enabled sectors, companies have given up spaces as they have shelved or delayed their growth plans.”

According to Rao, none of these companies have actually downsized their offices at least till now. But they are actively thinking of either downsizing or growing within the existing spaces. “This is going to have a deep-rooted impact on developers as well as facility managers. The real impact of this will be known only by the end of the year where we are expecting to see a lot of consolidation as well in the commercial real estate sector,” Rao told BloombergQuint.

But not everyone agrees.

According to Jagdish Nagbushan, property consultant in Bengaluru and founder, Spectrum Realty India, it’s nowhere close what was reported. If such a large space of 3.35 million sq ft was surrendered in the city, it would have been reported through reliable channels, he said.

Leases that expired or are yet to be finalised are on hold can’t be called surrendered, he said. Developers would have indicated their vacant space number of or least approached property consultants, he said. “We haven’t seen anything like that happen at this moment."