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The Impact of COVID-19 on the Commercial Real Estate Sector

The resurgence of coronavirus cases in the country has brought with it uncertainty and doubts in the commercial real estate segment. A majority of the country is under lockdown-like restrictions and health being topmost priority, construction activities and transactions will pause until a period till the infections come under control. The work from home initiated by several corporates during the last year’s lockdown had put a lot of stress in the office segment. Retail too was impacted with substantial fall in footfalls.

According to Knight Frank, transactions fell 35% YoY to a six-year low of 3.7 mn sq m (39.4 mn sq ft) in 2020, while new completions dropped 42% YoY in the office segment. Vacancy and rentals were also under pressure. Transactions saw some upsurge in Q4 2020. Absorption and vacancy both continued their declining trend in Q1 2021 but with some improvement from Q4 2020.

The pressure on office spaces in likely to continue in 2021 with many corporates announcing indefinite work from home. The pressure on rentals may prompt them to vacate offices leading to rise in inventory. Office hubs are emerging as the next big thing and may witness some demand for smaller spaces across a wide geography. This will also enable corporates to explore opportunities in flexible workspaces to avoid long-term expenses and will look for more flexibility and relaxation on their leasing terms.

The mass inoculation drives and the pace with which the pandemic is mitigated in India will determine how quickly normalcy returns.

Commercial establishments, shopping destinations including malls also had a negative outlook last year because of limited footfalls, closure, and restrictions, growing acceptance of e-commerce. The fresh round of lockdowns may lead to another round of rental negotiations/waivers between brands and mall owners in the coming period. Long-term leasing plans of both malls and office spaces remain uncertain and are dependent on how quickly consumers return to their spending habits. Some caution in spending is also expected to be witnessed in view of the uncertainty around lives and livelihoods.

A delay in the recovery in new leasing activity is also expected as a large share of employees will be continuing to work-from-home, owing to the health risks. There is no immediate visibility of them returning to offices and potential leasing transactions may get further deferred to a certain period. The rise of coronavirus cases will impact the smooth flow of funds into the commercial real estate sector however, as soon as cases come under control and vaccination speeds up, normalcy will return.

Today, the real estate segment is better prepared and well-versed with the knowhows of a pandemic which will lead to an increase in transactions soon. Low -interest rates, conducive government policies, easy finance options, digital methods, and well-managed infrastructure will put the segment back on the recovery track soon.

The commercial real estate sector continues to be a favourite amongst investors for its ability to offer a high return and tendency to quickly bounce back to normalcy.

Photo Credit: Google Images

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