We expect office rents to remain muted this year

The coronavirus disease (Covid-19) pandemic and resultant lockdown are expected to have a massive impact on the leasing of commercial properties. In the first quarter of the current calendar year, the absorption of office properties has come down by 30 per cent. RAMESH NAIR, chief executive officer and country head at property consultancy firm JLL, speaks to Raghavendra Kamath about how the segment will get impacted. Edited excerpts:

How will work from home (WFH) affect demand for offices this year?

Corporates will create greater ability to WFH globally. WFH can take away 5-10 per cent of office demand. In the long run, we expect accelerated adoption of WFH policies by companies globally. However, it is important to understand that there are a number of challenges when working from home. Bandwidth is definitely a challenge in a country like ours. For business process outsourcing companies or technology companies based in special economic zones and Software Technology Parks of India, there are regulatory bonding obligations which they will have to adhere to.

Do you feel landlords will defer or waive office rents during the lockdown period?

Landlords’ contention is that tenants still have ongoing operations with WFH enabled by servers placed on landlords’ premises being fed by uninterrupted power in temperature controlled environment. Force majeure and rent abatement clauses will be fiercely debated. We also expect tenants to be reluctant to accept increased rentals when renewals come up over the next one year. There is no knee-jerk reaction from the occupiers. However, we expect a number of our clients to reach out to us to restructure their leases, given the cost pressures they are under. Tenants are still committed to deals under negotiation, but want to delay rent commencement dates and push out possession dates.

Do you expect any downward impact on office rents this year?

We expect rents to remain muted. A number of our clients have put leasing closures on hold, but that is for the next three-four weeks. Fundamentals are still quite strong, with low vacancy and not a lot of supply coming in for the next two years. However, we do see that absorption will definitely not be the same as last year which was at 46 million square feet. We expect 25 per cent and new completions to get pushed to next year, given the availability of labour and liquidity challenges.

How will the whole issue impact the business of co-working spaces?

There will still be demand for co-working spaces because it offers flexibility and helps companies’ business continuity planning. This year a lot of chief executive officers and chief financial officers will be under cost pressures and forced to not invest capital expenditure. However, the industry will get impacted due to social distancing, community issues, and challenges of not knowing people around you. Co-working players will have to rework their designs to follow a de-densification strategy and rearrange interiors and common areas. Also, WFH can have an adverse impact on the co-working segment.

How will the whole issue hit lease rent discounting (LRD) done by banks? Will it affect LRD by developers?

LRD as a product enables lending by the bank to developers based on the cash flow from the property of developers. It is one of the most secured lending products since cash flows are based on contractual agreement that the occupiers sign with the landlord. After Covid-19, if there are negotiations, that will reduce these cash flows or change the nature of payments. The first effect is that the loan to value will get affected; second being month-on-month repayment factored in by the bank may also get affected due to renegotiation of rents/terms. The developer may need to infuse equity to make these obligated payments to avoid any defaults leading to a non-performing asset.

Will force majeure be implemented by mall developers? Are retailers getting it?

Force majeure clauses will be governed by that specific contract between the retailer and the mall owner. We expect the number of litigations over the force majeure clause to increase over the next few months. The top five retailers in the country occupy significant space in every mall and will use their negotiating leverage to push hard on rent abatement. For an event to constitute force majeure and for parties to seek relief for non-performance of a contract, the event must be beyond reasonable control and reasonable steps taken by the parties to mitigate the loss.

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