The unprecedented health crisis due to Covid 19 pandemic has disrupted most of the businesses during 2020 and 2021. The commercial real estate segment in India bore the brunt as leasing activities stopped abruptly, after registering an impressive growth in previous years. The chaotic situation where leases were renegotiated, spaces vacated and payments defaulted, created an unprecedented low for the CRE sector. However, 2022 ushered into a new hope with a successful vaccination program and no serious community health challenges.
Firstly, the importance of both, Grade a tenants with high credit worthiness and Grade a spaces available for leasing, has become more pronounced. The other and equally important trend is the offer of flexible lease options that landlords are willing to work out with tenants especially for Grade B properties.
In addition to these widely observed trends, the increasing acceptance of flex spaces and co-working spaces is also noted across all major cities. Probably corporates are using these to tide over the short term uncertainties of businesses and, to delay capex.
A big chunk of corporates are now trying to mitigate the impacts of the crisis by adopting multiple channels to reach the customer. This is mainly for the businesses that are operating in the service sector. Some businesses like restaurants and retail stores endured the extreme despondence and altered their business model with a mix of online and physical presence.
The long drawn pandemic has also brought societal well-being and sustainable issues in focus. Though workplace transformation with sustainability and collaboration at its core had begun a few years back, the pandemic has fast tracked the progress of the same.
Let’s examine some of these trends in detail.
- Increasing importance of Grade A tenants and spaces
The pandemic has left deep scars on the economy. While most of the companies struggled to keep afloat, the ones with good cash-flows and efficient business models could come out of troubles faster and are back in growth. They also kept communicating with landlords transparently and managed the lease obligations during the lockdown period honestly, while most others found themselves in a complete disarray. This experience made Grade A tenants a favourite of landlords.
On the other hand, tenants found managers of Grade A properties supporting them in their endeavour to continue operations under unprecedented circumstances. While Covid 19 caught everyone by surprise, Grade A properties could create the required facilities to reopen quickly and helped tenants get back to normal operations. This was seen in case of all kinds of commercial properties but more specifically for office and retail spaces.
- Acceptance of new lease structures
Considering the shift to remote or hybrid working, and the ongoing uncertainty brought on by COVID-19’s resilience, it’s no surprise that many tenants want flexible and short-term lease structures. This is especially true for smaller deals and current leases, many of which have seen short-term extensions.
Incidentally, the new large size leases have not been impacted as much. Most of the leases signed in H2 of 2021 and H1 of 2022 are for long periods and don't show any significant difference from pre-pandemic arrangements. However, as the lease terms go, the force majeure clause is the one which is receiving immense attention.
Both the lessee and the lessor are trying to shift the risk to the other party, and a great deal of negotiation is involved in finalising it. Most of the landlords are also agreeing to some adjustments in terms if such eventualities have to arise in future.
- Space redesign requirements
There is a great deal of ongoing discussions around the future of office spaces and new models of working. While certain companies have decided to mandate a return to the office, many more have accepted the fact that flexibility will be an important recruiting and retention issue well beyond COVID-19. Many of these companies are actively exploring ways to make coming to the office attractive to their employees, either through the physical attributes of the space, enhanced amenities, or proactive programming to ensure that time in the office is well spent and dedicated to matters that can only be accomplished by in-person interaction.
The landlord must work with the tenants to meet these requirements. Providing required amenities, redesign of free spaces and passages, and reduce density in public areas are key demands from tenants. Landlords also need to adopt new health-safety protocols such as better air filtration and additional cleaning, which increases cost pressure.
- Flex-spaces as new tenants
The pandemic led disruptions have shaken confidence of a number of mid and small businesses about future projections. This makes it difficult for them to plan required space to lease ahead of time, resulting in them being attracted by the advantage offered by flex spaces. This has been further enhanced by the state-of–the-art office facilities offered by these sled spaces.
These flexible space operators have, therefore, are emerging as a large enough commercial lease segment and can’t be ignored by landlords. In some cases, they have been able to transform poorly rated but well located spaces attracting Grade A tenants. The trend clearly indicates a quick growth for them. Some landlords may also seek to fill vacancies through licensing vacant space as fully furnished, flexible office space until they can get a long-term tenant.
- Relevance of lease to hybrid business models
There is no denying the fact that e-tailors received a leg up during Covid times. This has resulted in a lot of businesses trying to build in an e-commerce part in their business. It has resulted in a large demand for small warehouse spaces within the cities to manage efficient supply chains. The warehousing businesses are fast adapting to a hub and spoke model where a large warehouse space is servicing a number of smaller spaces for quicker deliveries without disruption in supply chain.
This change is visible not only in retail but also in restaurant businesses. The restaurants were one of the last to be allowed to open up fully, forcing them to adapt to at-home dining services. With food delivery players dominating the customer orders, restaurants are forced to make arrangements for order deliveries through these players, while also providing the required dining experience to on premise customers. These changes are requiring different space allocations and lease terms that facilitate such hybrid models.
- Sustainability issues
Overall, there is a clear shift to a conscious workplace, the need of which is highlighted by the pandemic. The lockdowns gave the organisations time and space to rethink its employee culture, recognizing that sustainability and inclusiveness are key elements of success.
The extreme weather events across the world in last few months have been debated widely and many multi-national corporations have been making a firm move to adopt sustainable practices. This is affecting leasing business as an energy efficiency or green building is preferred by such corporates over others. As they form a large chunk of the Grade a tenants, this trend is expected to dominate the leasing negotiations.
The past 2 years have been a transformative time for the CRE industry and we’re just coming out of challenges posed by the pandemic. Staying ahead of trends, making necessary preparations for the future, and mitigating legal risk will be crucial. For now, though, market fundamentals and discipline have, broadly speaking, held up amid the pandemic.
ImpactR is a leading data-driven commercial leasing platform working with brands and property owners in the region, tracking the latest trends in commercial leasing and helping its partners adapt to those ahead of time.