Commercial Realty on A High – Too Good to be True!

The latest data on office leasing dished out by the international property consultancies and data analytics companies would make us believe that we have almost reached the pre-covid time consumption levels. The industry statistics tell us that Delhi-NCR market is currently the numero uno office leasing market in India.  Looks quite positive and encouraging, isn’t it? But it is too good to be true, especially when we see empty or half- filled office buildings in the periphery of central business districts (CBDs), away from commercial retail hubs.

The truth lies somewhere in between. It is true that grade A office space in CBD areas is getting consumed. New age companies, banking, insurance and other finance companies are leasing large office spaces. Also, large office space rentals are increasing but only in Grade A office spaces in CBD areas.

But then there is the other side of the story which is worrisome. Notwithstanding the leasing hype around office realty in Delhi-NCR, office spaces created away from commercial/retail hubs still remain vacant. The truth is that barring the Grade A office spaces in central business districts, lots of office spaces are actually lying vacant.

Looking at the ground real(i)ty, the whole situation is quite worrying. What is really concerning is that amidst this unreal hype, more and more new commercial projects are being launched when the ready-to-move office spaces are lying vacant and are available at very low lease rent. That the situation is not rosy as is being painted, is evident from the desperate attempt by the developers to sell office space on assured returns basis. This truly is not sale but low-cost debt financing. From the investment perspective, if properly calculated, the office space loaded with 7-8% returns over 3 years is lower than the constructed landing cost of the same.

Industry statistics tell us that today Delhi-NCR is the leader in flexible or shared office leasing. But, looking at the present trend of ‘work from home’ and ‘hybrid working’, all the hype around ‘back to office’ also looks misplaced. Industry statistics also tell us that today Delhi-NCR is the leader in flexible/shared office leasing. Hence, going forward, in times to come, we will see greater demand for shared spaces, leading to lesser offtake of regular office spaces.

There are other factors which may well adversely impact the office leasing. Look at the paradox of rise in office leasing in Tier-2 cities. Migration from metros to suburbs, on one hand will boost the demand for office space in Tier-2 cities, but at the same time it will create more vacant spaces in metros. This, in turn will result in reduction in lease and capital value, making it less attractive for investors, developers, consumers. In coming years, the adverse impact of Artificial Intelligence (AI) will also be seen. The job losses due to AI will directly translate into lower demand for office space.

In this backdrop, the big question is – What should be done to rectify the situation to ensure the long-term sustainable growth of the commercial office sector. As infrastructure plays an important role in real estate development, the government must keep its focus on quality infrastructure – road, rail, metro and airport to boost connectivity. All suburban centres should embrace the development model of smart cities with well-planned residential, commercial, retail and industrial spaces with focus on green energy-efficient buildings, complete with social infrastructure -health, education etc. Simultaneously, efforts should be made to decongest metro cities even if it calls for incentivizing industrialists to relocate to suburbs. The concert of ‘AR’ assured rental ‘LG’ lease guarantee needs to be closed as this will help rationalise lease rental and increase feasibility.

Last but not the least, there is a crying need for authentic data for commercial real estate (office and retail) so that developers can adopt a calculated approach on launching fresh inventory especially as the new tech environment in the wake of AI and Q Commerce, besides the entrenched concepts of ‘WFH’ and ‘Hybrid working’ are boosting shared office spaces, in turn impacting the demand for regular office spaces. A cautious approach is the way forward.