As expected, due to the COVID19 and the nationwide lockdown the economy has been hit badly, and commercial real estate being an integral part of our economy, is therefore no exception. There were already very low sentiments towards the commercial segment, due to excessive supply in this sector and in the present circumstances things are going to worsen. New project launches are going to be affected badly, rentals are likely to be substantially revised southwards and sale prices may come down significantly. All this will impact the commercial segment in myriad ways.
The first big change that happened due to this pandemic is that, all the IT and customer support companies almost overnight switched over to the concept of work from home (WFH) for all their employees. Initially there were chaos and lot of difficulty, but then they got accustomed to it, and now the companies have realized that even though the productivity of the employees may be a little less working from home, but the companies are going to save a lot of cost due to the shift. The first being the rental expenditure, second is transportation (both time and cost) and thirdly the food and other basic amenities that the companies were providing to their employees at work places which is no longer needed as a part of the new normal. Many big companies have already communicated to their employees that they are going to continue the WFH model. These companies are likely to part with their huge offices and look for small spaces where they may call employees to solve their problems or meet them physically, if and when such a need arises (though it seems most unlikely, as video conferencing is going to slowly and steadily replace the personal interactions). There should be a lot of availability of vacant office spaces in that case and that may lead to substantial lowering of rentals and prices.
It may not all be hunky dory as is being perceived, as we need to take a few other things into consideration. Even if the companies ask their employees to work from home, but the basic staff or the necessary ones, such as, those working on cyber security or upkeep of company data, will require much more space, as previously space required per person was nearly 70 sq. ft., but due to social distancing guidelines and norms, this will rise to 120 sq. ft. per person. Secondly in our homes we don’t have that WFH environment, the technology doesn’t support it so well as it does in offices and employees may feel disturbed due to the movement of kids, spouses or other family members around them. We must keep in mind that, the way we live and interact in our homes is totally different from the western world due to cultural differences.
This WFH culture will definitely give advantage to the small towns, as most of the low paid staff working in BPO’s and other such offices have moved to their respective hometowns and with this pandemic they have realized the importance of living with their families. In view of this new paradigm, the companies may now want to open their satellite offices in these small towns due to cost cutting and availability of inexpensive work force which is happy working from their homes.
The second sector that is going to be affected is the big retail stores. We all have been habitual to going to big stores for our shopping needs, as we were neither enthused nor so well versed with the idea of online purchases. This is because, for us even now seeing is believing and we are stuck to the see, touch and feel concept. But with this pandemic consumers were forced to buy things online. Government is still not clear whether to open the big malls and now after more than 2 months of online shopping, many people have started getting comfortable about it, or may be they have understood the new way of doing it. Companies would feel that, rather than going for big retail outlets, why not have big warehouses in the outskirts of the cities and deliver things to people’s homes rather than spending so much of amount on rentals, electricity, maintenance, salaries and other expenses. Opening of stores in malls used to be a medium of publicity and advertisement also and companies, even if they were making losses in those stores, were continuing to run them, thinking that these physical stores were atleast showing their presence in the market place. But in the current post COVID-19 scenario, companies would rather like to close down their operations in the big malls and markets and would like to increase their presence online on different e-commerce platforms. The same is true for the restaurants and big food outlets also, as people will prefer not to socialize or eat out. The rents and operating costs are so high that they will prefer closing the outlets. Furthermore, the maintenance costs are so high in malls and high street markets that, if the properties are not rented out fast, the owners may consider selling them, resulting in excess commercial real estate inventories, naturally leading to fall in prices (for both rentals and sale). Most of the tenants in this sector have requested the owners to give heavy discounts on the rents and in a few cases, tenants have stopped paying rents and have asked for a waiver for few months atleast till the lock down lasts and thereafter, rate cuts in the subsequent rentals too. The owners also don’t want their property to be vacated as they know that in these difficult times finding a new tenant will be extremely difficult and they are forced to compromise on the rents.
The third unfortunate sector is the Tourism & Hospitality sector, which is the worst hit sector. As Travel is generally closed and even the few who are travelling, are those who have some urgent work to do, or have to reach their homes, having been stuck at different places during the lock down. This sector is very badly hit and the people working in it are losing jobs by the day. For the lucky few who are being retained, there are big salary cuts. There is absolutely no liquidity in the market, the sentiment is too low and this doesn’t look to get over soon. Travel, Tourism & Hospitality sector is something related to your mood and money and both are in the negative nowadays.
However, there are a lot of people, who have resources and won’t hesitate to plan their holidays. But these people also would not like to travel abroad and are likely to choose local destinations, after seeing the plight of Indians who were stuck for months together in alien lands as there was an absolute travel ban right across the world due to the pandemic. This may give some much needed respite to this sector but it depends how fast government is able to open operations and services in this sector.
Another sector that was emerging slowly and was getting popular was co-working spaces, which was already very popular among startups and individuals and with this WFH concept, companies would like to have small spaces in these co-working offices which are located close to the residential localities, so that the employees don’t have to travel much and they can meet as and when required. This may give some boost to the Co-working sector.
The sector which is going to benefit the most out of this pandemic is the manufacturing sector. As a direct fallout of the pandemic, so many MNC’s with their manufacturing units in China will plan to move out to different countries. For now India seems to be on the forefront, to receive those who intend to shift their manufacturing bases out of China. The central and the state governments have recently announced many incentive packages for these industries and some states have also relaxed labour laws. Countries wanting their citizens to exit their businesses from China, will encourage companies to start their production in India. The Central Government has already asked the concerned ministries to see how they can attract these investors and the States are not too behind. Uttar Pradesh and Tamil Nadu are already working on different packages but more needs to be done and rapidly too. Governments need to cut down on the red tape. The problem in India is with the laws and the general perception with the regulators is that, they think that all the business houses are corrupt and are here to cheat and only earn money. Providing hassle free infrastructure including, land, electricity, water, roads and changed tax and labor laws and relaxation of regulatory rigmaroles should be the key to this.