Covid-19 Triggering Paradigm Shift in Office Space Demand

Due to the COVID-19 pandemic, the Indian economy has undeniably hit an all-time rock bottom. The level of uncertainty in the economy is currently at an all-time high with the trajectory of the recovery difficult to forecast. In the commercial real estate sector, we can see that the pandemic has accelerated some trends. For example, there is a shift from CBD office spaces to more suburban properties. The reason behind the paradigm shift is that many corporates are anxious not to commit to big CAPEX and also the work from home culture (which, in case of some MNCs and IT/ITES companies will be reinforced till the end of the year) is also another reason that corporates are adopting agile portfolios and adapt the physical office to deliver collaboration.

As firms reduce headcount and cut costs to weather the losses that they have incurred during the lockdown period, office real estate will be at the top of the list to shed. And with the sky-rocketing high rentals of CBDs in the top 8 cities, many corporates across the board will try to shed their premium address for a more reasonably priced locations in suburbs in Grade B and C office properties. Moving to a reasonable office location has become part of the business continuity plan of many companies as the savings they will make from moving from a CBD to a suburban location, can help them in breaking even their bottom-lines.

Rental difference between CBD and SBD in some of the key cities:

To give a striking example of the rental difference between CBD, SBD and suburban markets, let us discuss the ongoing rentals in Delhi, Noida, and Pune:

Delhi:  Average monthly rentals in Grade A office spaces in CBD areas of Delhi like Connaught Place range between Rs. 12,000-Rs 17,000 per desk/month for coworking spaces and somewhere around Rs. 25,000 /desk/month for conventional commercial Grade A offices. Grade B and C office spaces in the CBD areas are at least 20% cheaper. Whereas if we move to the SBD areas in Delhi South-East Delhi and Delhi International airport, East Delhi and North Delhi the rentals here are on an average around INR 7,000/desk/month for coworking spaces and approx around Rs. 15,000/desk/month for conventional commercial Grade A offices. Grade B and C office spaces in SBD areas are lower by at least 30%.

Noida: Average monthly rentals in Grade A office spaces in Noida are between INR 5,000-10,000/desk/month for coworking spaces and between INR 7,000–12,000/desk/month for conventional commercial Grade A offices. Grade B and C office spaces are lower by at least 15%.

Pune: Average monthly rentals in Grade A office spaces in CBD areas like Laxmi Road, Camp, Bund Garden, Koregaon Park, Shivaji Nagar, etc. are anywhere between INR 5000-10,000/desk/month for coworking spaces and around 12,000/desk/month for conventional commercial Grade A offices. Grade B and C office spaces in the CBD areas are lower by at least 20%. Average monthly rentals in Grade A office spaces in SBD areas like Kalyani Nagar, Yerwada, Viman Nagar, Aundh, Baner, etc. are anywhere between INR 4,000–7,500/desk/month for coworking spaces and around INR–9,000/desk/month for conventional commercial Grade A offices. Grade B and C office spaces in SBD areas are lower by at least 30%.

The Shift:

An interesting trend that is coming to forth by the COVID-19 is a shift by office tenants from properties in the central business district (CBD) to more SBD and even suburban settings. Over the past few years, many corporations opened offices downtown to capture the millennial workforce. However, in light of the pandemic, companies may look to move to the suburbs where space is plentiful and social distancing is much easier to enforce.

CBDs have been a destination for tenants for many years. The reasons are numerous and include a central location, a diversified choice of office buildings from which to choose, and, in big cities, mass transit to the CBD which makes it easy for employees to reach the office without the need for a car and parking.

 Now, with COVID-19 and the new health protocols accompanying COVID-19, how many employees are going to be eager to take public transportation (whether a bus, subway, or otherwise) to get to work? How do employers feel about asking their employees to potentially risk their health getting to the office downtown? Some of the attractions of leasing space in a CBD (such as not needing a car and limited, but expensive, parking) are now problematic because of COVID-19 and the new health protocols in place due to COVID-19. Do employers now look for office space in smaller suburban office buildings (one to two stories) or in smaller retail shopping centers (presuming there are no zoning issues) with adequate surface parking? Also, in this type of office space, there would be no need to use elevators. 

The increase in working from home in addition to the new COVID-19 health protocols may accelerate this trend of tenants shifting from leasing office space in the CBD and shift to leasing office space in more suburban settings, closer to many employees’ homes.

Global Scenario:

With businesses globally taking on to the downsizing and finding ways to spread workers further out in the spaces they have, and keep others working from home (or at offices outside the city), moving from a CBD location to an SBD location or from a Grade A office to Grade B and C office has been a global scenario now.

In the US, companies are currently opening satellite offices in suburbs, which would allow for more in-person team interactions without forcing a critical mass of employees to commute into the city before it’s safe to do so. Similar trends have been noticed in Australia swell as in the UK.

Way Forward:

Globally, the Fortune 500 companies take up an address in CBD locations for many reasons like a prestigious address, great social infrastructure, transport facility and all this also lured and wooed the right set of millennial talent. But now, the companies are realizing that they are either operating with half of their strength at the time and as maintaining social distancing will remain a norm in near future swell and people will avoid taking public conveyance, even once they are functional, Companies are taking pragmatic measures of taking bigger, spacious and low rental office spaces in the SBDs or suburbs of the cities.

If global trends are to be believed more and more tenants are leaving their plush downtown CBD locations for a lesser rental suburban location and some analysts feel that maybe office spaces are also going the retail way. And at least for short to mid-term the office leasing activity will see a lot of traction in the SBD and Suburban locations in the top 8 cities of India.