With Office Space Rentals falling steeply and supply of Office Space from 2009 onwards far exceeding the demand & demand projections for the next 3 years indicating in advance high Vacancy rates it must be a difficult task for businesses to strategise for present and future developments. This is an effort to understand the Market dynamics and evolve a Market Strategy for developers for future development.
Business
The main drivers for growth of the Office Space Market in India have been the IT, ITeS, Consulting & BPO (domestic & outsourced) which require large office spaces to operate. Based on the latest FICCI – Ernst & Young study the commercial office segment shall require an additional space of 367 M sq ft by 2013 out of which 256 M sq ft would be required by the Indian IT & ITeS sector.
Indian IT ITeS sector
The main source of revenue of the Indian IT / ITeS companies and those of the MNCs which operate from India are outsourced work from US or Europe. In order to understand the sort of work that we receive here in India, let us understands the two major reasons for outsourced work:
1. To reduce cost by outsourcing to companies which operate from cheaper locations
2. To concentrate on the core business and have some company manage the non core functions
Thus there is a forever pressure to reduce cost for the parent companies which forces the outsourcing companies to work on low margins. In order to maintain the low margins these companies need to have a ‘low cost’ operating model. Further, for outsourced work, there is a huge competition in the market with all IT/ ITES companies wanting to have a slice of the pie and also move up the value chain in their delivery model.
The top two cost drivers for such business are cost of employees and cost of office space and cost of operating from the same and thus there is forever a pressure to minimise both of them.
Supply
All business houses have realised that operating manufacturing facilities from metros is an unviable business proposition due to the multiple Tax and other Duties that is levied by the government. Most of such businesses have already moved out or are in the process of moving out thus freeing up prime spaces in the metros for use as IT/ ITeS Office Space or for future development. Government bodies holding large land masses in the metros are also hiving of such land to unlock their value. This has also released large areas of land for future development.
With property valuations and lease rentals sky rocketing from 2006 onwards many developers and small builders have invested in construction of large office spaces. 2010 is going to see the biggest supply of office space in India since most of the projects then are nearing completion.
Demand
The demand for office Space went down during 2008 – 09 due to the global melt down, however with the US & UK market getting back on its feet and Indian Private and Public sector companies investing in multimillion Dollar IT systems the demand for IT/ ITES services is back with a bang and it would not be long before we see the industry getting back to its usual average annual growth rate of 20%.
Product Characteristics
In real estate the top two attributes that determine the value of a property are Location and Location. With government investments improving the infrastructure of major cities, locational advantage enjoyed by the Central Business District over Suburban Business District is fast decreasing and so are the valuations and rentals. It may be premature to prove the sanctity of the statement but it may not be far off, when we shall have a situation where they will be within 15 - 20% which was in multiples of three to four in 2006-07 and decreased to two – three in the last one year.
Commercial Office Space comes in a few variants, namely Bare Shell, Warm Shell and Fitted- out. It has been increasingly been observed that there are takers for each of the variants in the market with Bare Shells being preferred by the BPOs, Warm Shell by the Indian and foreign IT companies and Fitted-out by the Multinational companies falling in the BFSI segment. Recent trends show that more and more developers and going in for Green Building certification which helps to reduce operating costs and works as a Marketing tools to project ones commitment to environment.
The major point in product characteristics is that it is increasingly becoming difficult for developers to project clear differentiation in product characteristics or attributes. Product differentiation is difficult and product innovation can easily be replicated by the market. Further, most of such Office spaces are managed by Property Management Teams of International Property Consultants who have standardised the process of service delivery and Developers fail to create a differentiation even in services.
Branding
Commercial Office Space market is a B2B market, characterised by decision making process based on the service delivery and products. However with Products and Services in the Commercial Office space market tending towards commoditization especially in Micro Markets, due to similar offerings from developers, there is a growing need for Product / Service innovation and Branding of Property to create a differentiation in offerings which shall help to generate leads and create an opportunity.
Front Offices and Offices of Key Business personnel are preferred in Prime Business locations – CBD / ABD for company image and to remain in the proximity of similar business or customers, however Back Offices can be located in Suburbs away from the City Centre and do not require a Branded Property charging a premium and increasing the cost per seat in the process.
Agents / Broker / Consultant
Most Occupiers who work on the Lease model are associated with Tenant Representatives from International Property Consultants / Local Brokers & Agents who guide them through the whole transaction process of Leasing of Space. Thus they play an important role as key decision maker in such transactions.
To conclude….
The bubble that was created due to the demand supply mismatch of Office Space, sky rocketing rentals across major cities has busted and the effect of the same is being felt now. Occupiers had planned bullishly and developers had invested in projects in order to cash in on the high rentals prevalent then without trying to gauge the competitors and that led to the oversupply and lower than expected demand in the market resulting in significant drop in Rentals. With Lease Rentals dropping sharply and with high vacancy rates in properties across all the cities developers will be very cautious before investing in any new project. The market is expected to see some consolidation and expect only the major players with pan India presence or holding large land in Prime locations to be in Business.
Occupiers are taking advantage of the present Market rentals, renegotiating existing rentals and consolidating their offices from multiple locations. Developers with existing / in progress development and with scope for future development to accommodate future expansion options of Occupiers consolidating their business are gaining in the process.
The way forward, it is expected that the Occupiers, after such consolidation shall look to partner with the developers for their future Office Space requirements, and developers planning their new developments after considering the requirements of existing Clientele, thus both gaining in the process. Developers shall gain by additional Office Space off take / assured part occupancy of New Developments while Occupants to gain by operating from a single location and pre-committed rentals which is always expected to be lower than the markets rates. Thus developers shall look to grow with their existing Clientele and bring in fresh Clients only as a measure of reducing Business risks.
