Mumbai: Office rentals might drop 20-30%, small companies stressed

The Fortune 500 companies, multinationals and foreign banks based in India's premier business district of Bandra-Kurla Complex (BKC) have not defaulted on rent since the lockdown began in March, but the stress is showing among smaller firms and start-ups. With uncertainties in the coming months, the current BKC lease rentals between Rs 250 and Rs 300 a sqft per month may come under pressure, fear property experts.

At Nariman Point, Property Consultant Ashok Narang said two of his clients have given notices to terminate their leave and license agreements. "One of them spent lakhs on interiors just three months ago, but now cannot afford the rent and wants to vacate the 3,400 sqft office," he said. Some clients in the area want to shift to smaller offices. "They say we can't pay salaries to our employees, how can we pay the rents?" said Narang.

Vishal Sharma, a commercial property owner in Nariman Point, said corporate clients have started delaying rent payments by a month. "They want more time. The next two quarters will be tough," he said.

As commercial lease rentals come under pressure, real estate experts said rents could decline by at least 20% to 30% as companies cut costs and retrench employees.

Corporates occupying large floor plates have not yet reacted two months into the lockdown, said Anuj Puri, Chairman of ANAROCK Property Consultants. "But if it persists, they may want to renegotiate the rentals or take a call on whether to continue occupying the offices," he said.

Puri said Blackstone-backed Embassy Office Parks real estate investment fund collected 97% rent in April and 75% of its May collection till May 27. "Big corporates have always honoured their agreements," he added.

But some BKC office landlords confessed that a prolonged lockdown will be devastating. "Property taxes and outgoings are the highest in BKC. Many may want to wind up and move to cheaper locations," one said, voicing the common fear.

Another debilitating after-effect of the lockdown on the commercial market will be many more empty offices as companies look to reduce expenditure and employee cost.

Before the lockdown began, about 86 million sqft or 12% of office space in the top eight Indian cities was vacant, of which 18 million sqft was in the Mumbai Metropolitan Region (MMR). "This could increase to 32% if the lockdown continues for another four months," warned real estate research firm Liases Foras in a recent report.

In the worst-case scenario, if the effects of the lockdown prolong till September, the vacant office space in these eight cities could reach 225 million sqft, crippling the commercial market, according to real estate research firm, it said.

"Reduction in employee cost will directly impact demand of office real estate as well as lease rates,” said Pankaj Kapoor, MD of Liases Foras.

Offices of banking and financial services, information technology and co-working spaces will be the worst affected. In the MMR, 69% of office space demand is from these three segments. Liases Foras said vacant offices in the MMR could increase from 18% at present to as high as 41% by September. "The highest quantum of vacant supply will be in MMR and the National Capital Region," said Kapoor.

Nauzer Bharucha, TNN, Mumbai

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