Nasdaq-listed IT software firm Cognizant said on May 4 that it will give up 80,000 seats, or 11 million square feet in office space, primarily in large Indian cities, as it looks to rationalise workspace in a post-pandemic hybrid work environment and reduce its annual real estate costs by $100 million by 2025.
Real estate experts said the cautious approach and adoption of cost containment measures are “natural and prudent” for companies in both the IT and non-IT sectors due to slow hiring and global challenges. Besides, the absorption of office space has witnessed reduced expansion activity, delayed space plans and a hybrid workplace strategy that is still evolving.
Cognizant said it is looking to set up satellite offices in Tier-2 cities and also modernise existing workspaces. “This reduction in real estate costs is net of investments to expand our real estate footprint in smaller cities, primarily in India, in support of our hybrid work strategy,” Chief Executive Officer Ravi Kumar S told analysts.
A cautious approach to contain costs
The move, experts say, is a means to make the bottom lines stronger by reducing office space costs. The aim may be to unlock capital through the sale of quality real estate assets owned by the company.
It should also be noted that most IT firms had set up campuses for captive use, often away from the main city. These later turned into commercial office destinations in themselves. Right now, since there is pressure on bottom lines, monetising real estate assets to free up capital seems to be the best way out, say experts.
“India’s IT sector is likely to face some challenges due to its export orientation and dependence on consumption in large economies of the world. With the Western economies facing banking crises and continued steep inflation, the pressure remains unabated. However, in the domestic circuit in India, the tightening of monetary policy should start to bear fruit, with inflation moving back towards its targets,” said Anurag Mathur, CEO – Savills India.
How Cognizant’s move will impact the commercial real estate market?
There has been a temporary decline in demand for commercial real estate, particularly in large cities. Several reports by international consultancies have attributed the fall in net leasing or absorption of office space to reduced expansion activity, delayed space plans, and a hybrid workplace strategy that is still evolving. Companies are consolidating, relocating and even opting for co-working spaces to save on real estate costs. This reflects the challenges faced by the corporate world amid global headwinds and an uncertain business environment, a recent report said.
“While we do anticipate a slow growth or a marginal year-on-year decline in office leasing demand, given India's positive economic outlook, it is likely that demand will rebound in the future. In these times, it is only natural and prudent for companies in both the IT and non-IT sectors to be cautious in their approach and adopt cost containment measures where necessary,” said Mathur.
However, it is important to note that India is poised to maintain a steady growth rate, which will act as a cushion again the office absorption falling drastically; or for the operations being scaled back as some catastrophic measure,” he said.
Real estate experts say it’s unclear what giving up space means in the case of Cognizant. It could be sale and lease, including leasing space to co-working providers to reduce operational costs, and also giving up space to a co-working provider and occupying the same office.
Is an alternative investment management company picking up the space where the IT firm intends to become a tenant and thereby succeed in converting the capital cost into operational expenses? Giving up space could refer to all these options.
A detailed questionnaire has been sent to Cognizant on the location of these assets and what "giving up" 11 million sq ft means. The report will be updated when we receive the company's response.
According to a real estate industry expert, Cognizant giving up 11 million sqft of commercial office space in large Indian cities may not have a huge impact on the commercial market in India. This portfolio is spread across markets such as Bengaluru, Hyderabad, Pune, Kolkata, and Chennai. This means that not more than 3 to 3.5 million sqft is likely to be released into the market every year for the next three years.
In any case, about 50 to 55 million sqft of new office space (developer stock) is released in the market every year, and 3 to 3.5 million sq ft of (corporate supply) is a small percentage. Even if it includes a retrofitted office supply, it is unlikely to have a major impact on the overall commercial space absorption. Besides, this would be commercial supply coming into the market which was not earlier, the expert said.
“In Q1 2023 India office clocked about 16 million sq ft of gross leasing volume from top 8 cities and within this, IT-BPM had the largest share of leasing at 30 percent. Globally, the situation has been tough but not only has India been resilient, but in some aspects, its attractiveness has improved. Add to this, in India, we have one of the most robust return-to-office and flight to quality by the occupiers while the vacancy and supply of Grade A assets has remained tight,” said Anshul Jain, head of Asia Pacific Tenant Representation and managing director – India and South East Asia.
A few companies may be looking at reorganising their portfolios, given their business requirements but the medium-term office outlook remains positive, he said.
A recent report by Savills India said that office space absorption across India’s six major cities stood at 14 mn sqft, registering a 16-percent quarter-on-quarter growth in the first quarter of 2023. However, the year-on-year gross absorption comparison indicates a 11-percent decline owing to global economic pressures.
A recent report by Colliers also said that due to the ongoing layoffs caused by slower external demand, a relative slowdown in overall commercial space traction is expected in 2023, particularly in the tech sector. "Time will tell whether the office market will overcome recessionary concerns and establish itself in the latter half of 2023, or whether the economic headwinds will have a long-term impact. However, the market is resilient enough to bounce back, as it did during the pandemic," the report said.
In January this year, CapitaLand India Trust (CLINT) had agreed to acquire a 1 million square feet IT park located at Outer Ring Road, Bengaluru for Rs 1,226 crore. A statement from the company said it would provide funding for the development of the project as part of the forward purchase arrangement. The project comprises two buildings with an aggregate net leasable area of about 1.5 million square feet.