Factors That Affect The Demand For Office Space
There are multiple factors that affect the demand for office space, some of which affect it in the short term, and others that have a long term impact. How the final demand for office space plays out, again depends on multiple other factors that affect the economy as a whole. But before I get lost in posing all these “ifs and buts” let me save you some time if you just want the summary of this story – I believe that office demand in India will remain strong.

Reduce Office Space Demand
Let’s start by remembering that office space demand is driven by jobs being created that require people the ability to sit together in the company of one another (hence: in Companies). So fundamentally, we need to worry about whether job creation will continue to happen or not in India. In this I am an optimist. Yes, Covid has created headwinds in the short term that are making it very difficult to create new jobs. And yes, there already was a slowdown in the economic growth of India pre-Covid. But let’s also remember, that offices are built to last 50+ years, and in this horizon, we have to believe that India has tons of productive and creative capacity to go on creating jobs.

So what are the “ifs and buts” that will impact this trend? Unfortunately, Covid has hit both liquidity and solvency of companies and therefore there is bound to be a short term destruction in demand for office space. According to latest CMIE data, 122 million people have lost their jobs already due to Covid, of which approx. 18 million were salaried employees. Even if 5% of these salaried employees previously occupied office desks (this is just an assumption with no theoretical basis whatsoever), we’re looking at reduced demand for office space for approx. 1 million people – that’s 70 million sq ft of office space at an average of 70 sq ft per person. To put it in perspective, the gross office leasing in India in 2019 was reported to be around 70 million sq ft according to a report by Cushman and Wakefield. It is still too early to tell what the actual numbers will be (and not what I’ve just made up). Clearly, there will be a short term decline in office space, and my sense is that it is likely to be about 10-15%.

Work from Home Culture
Now there is one more factor being spoken about that will reduce office space demand – the advent of “Work from Home” (WFH). This is something I personally don’t think will play out in the long run. As a short term strategy to reduce the risk of infection from Covid, it makes a lot of sense, but in the long run, I believe that humans are social animals and that we will continue to want to interact with one another. A recent study by Gensler Research Institute shows that only 12% of Americans interviewed wanted to work from home long term. Robert Putnam in his 2000 book “Bowling Alone” writes about how people become less engaged as their socialization is reduced. So what about large corporates announcing a major shift to work from home? I am skeptical that it’ll work. Research studies are also being carried out on the long term impact of work from home on employee productivity. Similarly, many organizations are still to assess if sensitive corporate or client data should continue to be accessed from homes. So will WFH capability make for a nice aid to enable employees to take a hot/cold/wet day off and submit their work from home? Yes. Will this allow some amount of office space to be released and repurpose the office desk as a “hot-desk” (i.e. no assigned seating)? Yes. How much will this impact office space requirement? My own prediction is that this will reduce office space demand at most by 5-10% in the long run.

Positive Impact On Office Space

There is also likely to be a positive impact on office space. The one thing that Covid has made clear is the need for hygiene in our surroundings. Packed offices will have to be reorganized – and perhaps larger workstations and seating arrangements which also comply with National Building Code fire norms, and air-conditioning capacity will be assessed more closely. The second demand will come from companies looking to establish “connected-decentralized” offices. Instead of that one million sq ft office in Gurgaon, perhaps companies will look at two half-million sq ft offices each in Noida and Gurgaon so that their employees can commute to the office nearest their residence and then connect through secure Video Conferencing meeting rooms.

What Is The Likely Impact On Rent?
Which therefore brings us to the final question – what is the likely impact on rent? Well as Economics 101 teaches us, it depends on supply and demand. In the short term, no new supply is likely to come up – investors will delay their decisions until there is more clarity, financing will become harder to fund new developments, and even if funds are available, construction itself will take time to ramp up as the migrant labor has gone back home. So the existing supply is all there is. Now, if a company has an office in a Grade-A building with low vacancy and limited supply in the market, I doubt that it will be able to renegotiate rent. The emptying office space will get taken up by tenants wanting to move from Grade B buildings (with poor hygiene) to Grade-A buildings. While cost-cutting by some companies (where jobs have been cut permanently) will obviously provide for churn in office space, as ICRA points out in its latest report, rental expenses typically account for only 1-2.5% of revenues of the office space tenants, so this churn may not be large. In the long run, I believe that companies will continue to occupy collaborative spaces where their employees can work and socialize. These offices will definitely have many more employee health safety (EHS) features hard-coded into their infrastructure – better sanitation, better air quality filter, more filtered fresh air, more open spaces. Well, that then, is my prediction of the future.

Source: https://www.torbitconsulting.com/insight/office-space-demand-what-happens-now