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Commercial real estate, most notably the retail and office spaces, have been hit hard by the COVID-19-induced new normal across the world. It is, hence, being debated whether commercial real estate would be able to reinvent itself, to remain relevant in the post-COVID world, where the work from home (WFH) culture and online shopping threaten to eat up the market share of retail and office space segments, which were highly lucrative till recently.
Impact of COVID-19 on commercial real estate market
As per a Track2Realty consumer survey, 56% employers are finding WFH to be a long-term reality. In retail spaces, the vast majority of Indians (as many as 84%) are comfortable with the reality of online shopping. Does this mean bad news for commercial real estate? Not quite, as the study also noted that the WFH culture was affecting the mental health of the workforce. No less than 68% of Indians were craving to return to the office set-up for better productivity and work-life balance. Similarly, malls that were more than the shopping centres, were being missed by a large share of the respondents. As many as 84% said that they would love to go back to the malls for leisure and entertainment.
This calls for a reality check. How can commercial real estate developers and operators pull back the eager-but-hesitant Indians? If WFH continues to be a reality and Indians are comfortable shopping online, why should office spaces and malls even exist? If the commercial spaces exist, there is a running cost to it. Most of the developers in this segment have the dual challenge of serving the debt interest as well as the occupiers’ increasing exit. Can there be an innovation that the market adopts seamlessly? Industry stakeholders, too, are thinking on the same lines but have no concrete plan of action as of now.
The future of office space after COVID
Vipul Shah, MD, Parinee Group, believes that after more than a year of adapting to WFH, organisations may be required to take into consideration full-office makeovers, to get employees back to their desks. New-age commercial spaces need to focus on collaboration and must elevate the principles of dynamic, purposeful and people-first workspaces that are focussed on a collaborative work culture, he says. “Adapting to futuristic and more agile ways of functioning, accompanied by technological innovation, have become a prerequisite for accomplishing a more transparent and rewarding work culture. In such a scenario, going phygital (i.e., a combination of physical and digital offerings) will help fix the gap caused due to physical and remote workspaces. These technically advanced two-way set-ups, through their adaptable nature and capability to reconstruct community among detached employees, will be the key for sustained growth,” believes Shah.
Aditya Kushwaha, CEO and director at Axis Ecorp, points out that historically, external shocks such as an epidemic and even economic downturns, did not have a long-term impact on commercial real estate. It was mostly immediate and never as widespread. Things are different in this post-COVID-19 period, as there is still a great deal of uncertainty. The WFH trend has resulted in weakened demand for large office spaces and even the rental market has taken a hit. “Companies have put plans for space expansion on hold. Even with rent/lease agreements, corporates desire far greater flexibility in terms and prefer spaces that require minimal capital investment. Malls are also looking at cutting down the time people spend inside. Before the pandemic struck, the objective of shopping malls was to make sure that consumers spend maximum time inside the store. The new approach will be to make sure that people are able to find what they need easily. There will also be steps introduced to cut down on the touchpoints for the consumers. It is also a possibility that outdoor retail spaces, such as walk-in malls, may see an uptick in the future,” says Kushwaha.
Vinit Dungarwal, director, AMs Project Consultants, admits that COVID-19 has fundamentally changed things in the commercial real estate space. The office space absorption across six major cities for 2020 stood at 27.4 million sq ft, which was a 51% drop y-o-y (from 55.7 million sq ft). There is a need to conduct a feasibility study and assess how companies in this sector can achieve the perfect balance between capital preservation and strengthening their competitive differentiation, he maintains.
“At this juncture, it is difficult to predict when the commercial real estate segment will return to pre-COVID levels. However, as the impact of the second wave is wearing off and things are opening up, it is presumed that retail space may get on track in times to come. Changing the business model is not advisable, as it may take a lot of time to fine-tune it and may also result in halting the progress that the space has now started to make,” says Dungarwal.
Will a hybrid model of retail and office work?
As demand is likely to remain subdued for the next few years, a section of analysts are also evaluating whether a hybrid model, where malls convert a part of the space (or floors) into office spaces and office spaces turning a part into high street retail with more shopping and leisure activities, could change the occupiers’ outlook?
- Commercial spaces need innovation to attract footfalls.
- Mall coffee shops as office meeting points and office spaces with leisure activities were used, even in the pre-COVID.
- Convenience stores and bank ATMs are already common at both, retail and office spaces.
- Malls converting into part-offices and office spaces turning into retail and leisure destinations, could attract footfall.
- A hybrid model could differentiate quality retail and office spaces from the rest in the market.
Although a hybrid model may be on a pre-drawing board stage at the moment, it seems logical for a segment of real estate that has to reinvent itself to remain relevant in a future-uncertain market. After all, the combination of leisure and work at the same destination, could attract more Indians than a plain-vanilla workplace or shopping mall.
(The writer is CEO, Track2Realty)