The aftershocks of Silicon Valley Bank’s (SVB) collapse in the US are likely to be moderate on office space absorption in Mumbai, especially in the IT segment, said experts. Overall, office rentals in Mumbai are close to but have not breached their pre Covid-19 levels, real estate consultants and brokers said.
What is the SVB issue?
SVB, a large American bank focused on start-ups and tech, collapsed two days after announcing it needed funds after a $1.8 billion hit on its investments in mortgage securities. SVB was shut down by regulators and the Federal Deposit Insurance Corporation (FDIC) said on March 10 that its assets have been seized.
How will the closure of SVB impact office leasing in India?
“The IT sector contributes to around 30-40 percent of the leasing in a typical quarter in India and sometimes even 60 percent; the focus is going to be on the IT sector amid the global slowdown and closure of SVB. We were expecting office leasing absorption of 38-40 million sqft in 2023 for India. Some moderation below 38 million sqft is anticipated but we will have to wait and watch up to June 2023 to know the extent of the moderation,” said Dr Samantak Das, Chief Economist & Head of Research, JLL India, a real estate consultancy firm.
“The moderation in office leasing is not only because of the closure of Silicon Valley Bank but also due to global economic slowdown. However, we also need to consider the fact that domestic leasing demand is increasing, and this is one positive sign for the office leasing market,” Das added.
However, Anarock, another real estate consultancy firm, maintained that the collapse of SVB has very little to do with the outlook for Indian commercial real estate.
“SVB holds banking for a lot of tech startups. Overall, the startup ecosystem is feeling the cost pressure and we have seen several companies laying off employees. Multinational companies are going slow on leasing anyway due to general economic pressure in the global markets.”
“Rents are also likely to remain flat, especially with a lot of new supply, which developers cannot defer deploying anymore. As a result, overall office vacancies in the top seven cities, including Mumbai Metropolitan (MMR), Bengaluru, Chennai, Hyderabad, Pune, and Kolkata are likely to increase from the current average of 16 percent to 18 percent this year,”
Thakur added. “This collapse has surely shaken the world. However, it has less to do with this incident and more with the generally tame outlook for the Indian commercial real estate sector in 2023.”
Office rentals in Mumbai have not breached pre-Covid levels
Despite several corporate offices asking their employees to report back to offices for work, vacancy and occupancy levels still remain a concern. Real estate brokers and consultants Moneycontrol spoke to said rentals in commercial spaces are yet to reach pre-Covid levels in Mumbai.
“In BKC (Bandra-Kurla Complex), office space rentals range between Rs 125 to 350 per sqft, depending on the type of commercial space, including premium, mid-segment and affordable. During Covid-19, rentals went down between 20-30 percent. And since the third quarter of 2021-22, the rentals have started reaching the pre-Covid range. Currently, premium office space is available at Rs 250 to 300 per sqft in BKC,” said Sunil Gehi of Mohans Estate Consultants in Andheri, Mumbai.
“In Andheri, rentals have breached (the pre-Covid rate) by 10 percent when it comes to commercial space, considering several IT companies, finance, and insurance firms moved out of BKC and leased space in Andheri. Owing to this, I do not feel BKC commercial rentals will breach the pre-Covid mark anytime soon,” Gehi added.
“Overall if we talk about commercial office spaces in Mumbai, the rentals have reached pre-Covid levels or are reaching there. But they have not breached those levels yet. There are multiple factors to it and one of them is that property owners do not want disruption where a particular company might vacate the premises owing to an increase in rental amount,” said Kaustuv Roy, Managing Director, Business Solutions, Savills India, a real estate consultancy firm.
“Post Covid-19, there are schemes like rent free, which are an extension of Covid-19 times, where property owners offer a model rent free for 3-4 months for a rental agreement of five years, without bringing down the rental, to ensure the market price is not broken.”
Roy added that in South Mumbai, the rental price has remained stagnant at Rs 150 to Rs 300 per sqft throughout. In the case of Lower Parel, the rental pre-Covid was Rs 180-200 per sqft, which went down during Covid-19 and is yet to reach the pre covid-19 level. This can be due to Lower Parel having two newer constructions coming up, resulting in stiff competition.
In BKC, there is hardly any space available. In pre-Covid times, the per sqft rental was Rs 300 and above; this went down to Rs 250-275, and has now risen to the Rs 300 level. Further, in the case of the secondary business district Andheri, the rental was between Rs 120 to 140; this went down to Rs 100 and now is somewhere around Rs 120 to 125, Roy added.
Hybrid working will keep co-working space alive
“One factor why rental of office spaces are not going above pre-Covid levels is because hybrid working is still there, and in a lot of organisations, 100 percent of the workforce is not back in office yet. Currently, 80-90 percent of such organisations have told their employees to come back, and hence one can expect office rentals to go up by the end of this calendar year, with vacancy levels going down and occupancy levels going up,” said Sanjay Chatrath, Managing Partner, Incuspaze, a firm managing coworking spaces.
“The Covid-19 phase has resulted in many big organisations adapting to co-working spaces. Post Covid-19, for example, out of 100 organisations, 40-50 might consider co-working spaces as one option.”
“In the case of our organisation, in Mumbai, we had 1,200 seats pre-Covid, with occupancy of 70-80 percent. The same went down to 40-50 percent during Covid, and has now gone up to 95 percent. With this, we are also setting up 2,000 more seats, which will mean our total seats and occupancy are both increasing,” added Chatrath.