Work from Home Policy and its Impact on Commercial Office Space Leasing

 

The disastrous year of 2020 brought inevitable recession for the whole world and India is no different. When will this pandemic end or we have to live with it? is still a question whose answer we all will get with the passage of time. Seeking answers for the issue is secondary, adapting with the new normal is the need of the hour. Work from home was not a known phenomenon in the corporate world even though it existed for a much long duration in the work history in tidbits. With the incoming and growing influence of the IT industry into the corporate world, the term work from home was used much more often by the working-class people which indicated the flexibility, adaptability and increased productivity differing from the regular 9-5 job in the Indian arena. It gave access to balance the personal and professional life in a more subtle way.

What is Work from home policy?

A work from home policy is basically an agreement involving employer and employees, in which they get privilege of working from home. Although work from home has certain guidelines in defining of policy responsibility, exception and eligibility. In short, it ensures that every employee understand what is right & needful for them and abide by them along with work from home privileges.

The pandemic has forced the industries in adopting new ways of working. Organizations must rethink their work and the role of offices in creating productive, and yet enjoyable jobs at the same time taking into consideration life safety for employees . According to NASSCOM, “IT industry leaders, who estimated that close to 50% of the country’s 4.3 million IT workers will soon work from home, were asked to detail the legislative changes required to facilitate this significant transition.” Seeing the economy getting sink every passing day left no hope to the adversely affected sectors such as travel & tourism, real estate, energy production, oil & natural resources, media & entertainment sector whereas some boomed such as the digital market, pharmaceuticals and logistics.

Real estate sector being one of the most affected sectors, there was zig-zag in sale of residential properties whereas it is expected that commercial office space leasing may fall by 30% in 2020 due to COVID-19, predicted by Ramesh Nair, JLL India CEO.

Changes in policy:

During COVID-19 impact companies are beginning to realize that their employees can be as productive from home as they are at offices and therefore seek to reduce the amount of space they rent. Demand for office space is something of a mixed bag in terms of demand. Many workers in multiple areas of the economy are working from home. However, there has been an increase in demand for smaller and shared office spaces, a trend that has nearly offset the shrinking part of this market. During the next five years, business owners will be changing the way they use office space and reduce rent expenses.

Still others will use office space solely for the purpose of meeting clients or storing excess inventory. ICRA believes that the impact on office space real estate players will be marginal. Rental expenses form a comparatively smaller proportion of the total cost structure of office space tenants. The rental expenses typically form 1 - 2.5% of revenues of the office space tenants. Better technological support has enabled a large number of office tenants to provide work-from-home facilities to employees and hence, operational disruption is expected to be limited .

Therefore, the ramp-up of leasing for sub-optimally occupied and recently completed properties will get delayed. Operational difficulties and administrative issues like curtailed movements, impacted bank operations, unavailability of signing authorities may also delay the rental receipts. Even though the probability of loss revenue is low for office space players, the presence of liquidity buffers will remain critical to sail through the possible cash flow mismatches. Notwithstanding the short-term disruption, the commercial real estate sector will continue to attract adequate interest from investors and tenants alike in the medium to long term. The industry does not foresee any structural change in the office space segment due to the ongoing COVID-19 induced crisis, stated by Assistant VP and Associate Head of ICRA.

According to Senior Director of Anarock Consulting, Mr. Ashutosh Limaye, 25% less employees in office may lead to a 15% reduction in need for office space. The reason behind this is that shared spaces in terms of common area or facilities might not reduce much. Mid-sized NBFC Clix Capital which has nearly 600 employees is planning to vacate half of its office space. “At least 50% of our staff will permanently work from home.” India expects sharp turnaround in 2021-22: RBI Governor Shaktikanta Das. For 2020-21, International Monetary Fund projects sizable reshaped recoveries, close to 9% points for the global GDP. India is expected to post a sharp turnaround and resume its pre-COVID, pre-slowdown trajectory by growing at 7.4% in 2020-21, says RBI Governor Shaktikanta Das.

Encouraging more employees to work from home will also help various organizations such as TCS save on costs, as it will require far less office space than what is occupied today. "We have come out stronger and our model is more proven than ever before," TCS's CEO and MD Rajesh Gopinathan told the news portal. TCS gearing up for 25/25 secure borderless workforce (SBWS) model the new normal by 2025. A greater amount of Work from home/Remote working will still persist: for the sake of resilience as much as anything else. “The next time a coronavirus comes along, we know we need to move quickly to this model, which means that it has to be in play - at least in part - most of the time,” says Coleman, Head of Economics, WSP UK. “I don’t think any business will want to go back to the way things were done, so that has an immediate implication for space” 

Reasons to implement policy change:

Government Policies generally focus on home-buying sentiment which is driven by cheaper interest rates on home loans as announced by the Central Bank. For easing the liquidity, the reverse repo rate has been revised from 4% to 3.75% which will promote the banks to infuse liquidity. Also allowing NBFCs, who have given loans to real estate companies to get similar benefits same as that of scheduled commercial banks, during these challenging times is an encouraging sign. Commercial real asset class loans will also observe a momentum as deferment of payment up to 1 year. This will provide time relaxations to developers in terms of construction and delivery of projects on time thereby spurring demand in the market.

Working from home was a quick reaction to the nationwide lockdown to stop the spread for coronavirus outbreak but it seems to become a permanent concept in real estate strategies. This is due to various challenges such as security, monitoring productivity, and most importantly the psychological impact on employees. Another impact of COVID-19 outbreak could be that companies split their operations at several locations, potentially benefiting smaller centres. “A lot of companies are going to be thinking about how they could make their workforce? If not pandemic-proof, at least pandemic-resistant,” says Kerr, Professor, Harvard Business School. “Opening a second office might not have made sense historically, but may be something that younger companies should do at an earlier stage. We have celebrated density and packing people together, but that’s putting a lot of eggs in one basket ”.

What should we conclude from this?

The future will depend greatly on policy support and economic stabilization and hopefully by the starting of 2021, the markets will be stable. Developers are optimistic for upcoming quarters which shows their positive outlook regarding future demand. We expect demand for commercial real estate to remain robust and the sector to emerge resilient and inevitably reinvent itself.

What about the future office developments? Do we really need to build extra space?

This will depend solely on the dynamics of supply and demand in local markets. In some of the cases, there was already undersupply of modern structure, high-quality office space, and COVID-19 is likely to worsen this, even if the demand remains the same in overall sector. Changes may also take a while to feed through. As pointed out by CBRE, commercial real estate is a lagging industry - two years elapsed before office vacancy rates peaked following the global financial crisis . The other side of the equation which can’t be overlooked is the supply of sufficient capital for office projects. WSP director Gary McCarthy is of the view that real estate will still be attractive and promising. “There is a deep pool of capital available for the right assets and real estate will continue to offer long-term investment, managers a defensive strategy for their portfolio, and return yields sufficiently above government bonds. There will be specific challenges – regional offices will struggle more than prime city centre offices – but I don’t see there being a drop-in capital commitment.”

The main question of concern for investors in the commercial sector, will be

How to differentiate your asset from the rest in the market. How can you make sure that tenants and employees will wish to go to your office space? What features will make your office into a compelling destination post-COVID?

There are various other things which would be looked after but the need of the hour for organizations is how they will take benefit from this pandemic and save on costs from office leasing. 

Endnotes

1. Reimagining the office and work life after COVID-19 https://www.mckinsey.com/business-functions/organization/our-insights/reimagining-the-office-and-work-life-after-covid-19#
2. Marginal coronavirus impact on office spaces, co-working players to be disrupted : ICRA- https://realty.economictimes.indiatimes.com/news/commercial/marginal-coronavirus-impact-on-office-spaces-co-working-players-to-be-disrupted-icra/74803275
3. Why do we need offices? - How will COVID-19 change the demand for commercial office space - https://www.wsp.com/en-GL/insights/how-will-covid-19-change-demand-for-office-space
4. Insights - How will COVID-19 change the demand for commercial office space - https://www.wsp.com/en-GL/insights/how-will-covid-19-change-demand-for-office-space
5. Do we really need to build extra spaces - How will COVID-19 change the demand for commercial office space - https://www.wsp.com/en-GL/insights/how-will-covid-19-change-demand-for-office-space
6. How will COVID-19 change demand for office space? - https://www.wsp.com/en-GL/insights/how-will-covid-19-change-demand-for-office-space

Author

APOORV TIWARI (PGDM-IM, 2019-21) 

Apoorv is a civil engineer fueled by his interest in marketing & strategy. He is trained under JSPL and CIL by getting into technicalities of operations as well as management. His openness to new learning landed him in infrastructure management. His profound interest in research helped him in contributing to various publications. And his travelling experiences had also helped him in learning new things and has endorsed life skills.

HIMANSHU MAHESHWARI (PGDM-IM, 2019-21) 

Himanshu Maheshwari is a Business professional having his own company named as Sansastone Impex in Rajasthan and pursuing post graduate diploma in Infrastructure management and also having civil engineering background. His interest lies in Real estate Business development.