Office Spaces Duck Slowdown Fears

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Recent reports by real estate advisory firms indicate a robust year for India’s office spaces in spite of prolonged hybrid work mode and fears of an economic slowdown in the West. Collier’s latest report expects a strong second half of 2023 for the office market. It revised its earlier demand estimate for 2023 from 35-40 million sq. ft. to 40-45 million sq. ft. across top six cities. Stable repo rate, improvement in GST collections and robust equity markets mean “the momentum is likely to continue in the second half of the year and result in better-than-anticipated office market performance in 2023,” says Peush Jain, managing director, Office Services, India, Colliers.

“Second quarter has already set the tone for a stronger 2023,” he adds. According to the report, during the first six months of 2023, technology sector led office space demand with 24% share, followed by flex space (18%) and engineering & manufacturing (17%). While the technology sector has been the biggest demand driver over the years, flex space operators have started making a mark. A recent report by Vestian estimates that flex office segment will account for a quarter of the office space absorption by 2025. It says the stock of flexible office space will rise 52% by 2025 from 53.4 million sq. ft. to 81 million sq. ft. Vestian CEO Shrinivas Rao says flexible space operators offer not just low-cost, technologically advanced spaces but also flexibility to scale up and scale down. “While 2023 is likely to be challenging for businesses amid macroeconomic uncertainty and fear of a recession, flexible spaces are a way to navigate global headwinds,” he says.

Meanwhile, as IT services companies have sounded off caution for the coming year and big start-ups are on a resource conservation mode, the market is seeing a demand counterbalance with enterprise clients moving to other options. Especially global capability centres (GCCs), which are actively looking at flexible work spaces rather than locking up capital in long-term tenancies. Nasscom estimates that in FY23, there were nearly 1,580-plus new GCCs in India, up from 1,510-plus in the previous fiscal. Earlier, speaking to Fortune India, Arnav Singh Gusain, head (real estate and product), WeWork India, had said that five years ago, SMEs and start-ups occupied 60-70% seats in offices while enterprise clients accounted for the remaining 20-30%. That has now been reversed. “From a market perspective, having Fortune 500 clients in the portfolio adds to valuation and acceptance. Plus, lock-in revenues are secured,” he says. Currently, WeWork has large global enterprises such as Honeywell, Dyson and 3M as clients. Even in case of Embassy REIT, revenue from IT services is now down to 15% (25% at the time of IPO in 2019).

While it is still being debated if U.S. will enter a full recession, historically, India has felt the impact of such an event only for two-three quarters. The country then bounces back as market dynamics become lucrative after a correction, says Rahul Arora, head, Office Leasing Advisory, JLL India. “All factors put together, India outshines at the end once dust settles,” he says, adding, “Typically, when there is a slowdown there, we tend to benefit from it.”

Source: Fortune India