Hyderabad houses 4.5 million sq. ft. of flex space; one of the fastest growing flex markets in the country: JLL
Hyderabad hosts 4.5 million sq. ft. of the total flex space stock in India
and is one among the fastest growing markets in the country, according to a recently launched report by JLL,
Reimagine Flexspaces A 360⁰ view.
The
demand for flexible spaces in large cities such as Hyderabad is likely
to grow, with businesses having a greater need to accommodate portfolio
expansion and
contraction along with crisis support. This indicates the inherent
growth potential of the flex office market in India.
“Flex
space operators provided organised workspaces with a lock-in-period of
1-2 years. Companies that have pre-leased with scheduled delivery over
next 1-2 years have
shown interest in such flex spaces to have their temporary offices.
Apart from big MNCs, Hyderabad also houses many start-ups and small
companies in the field of Consulting, IT, and logistics. Flex spaces
have become financially feasible for such small players
as well with low capex,” said Sandip Patnaik, Managing Director and Head (Telangana & Andhra Pradesh), JLL India
The flex space market in
Hyderabad
saw major traction from mid-2018 and peaked in 2019. Flex spaces
accounted for 28% of total office space leasing in 2019 in the city.
While
flex spaces already enjoyed popularity amongst start-ups and
small-sized companies, there has been an increased traction amongst
large BFSI and IT-ITeS occupiers mainly as managed office
spaces as well as incubation spaces. This supports the significant
expansion by flex space operators in the city during the last 2-3 years.
As
per a recent report by JLL strong signs of recovery were witnessed in
the Hyderabad office market in Q3 2020 with a healthy gross leasing at
1.9 million sq. ft.
At the same time, net absorption grew by 31% from the previous quarter
to 1.5 million sq. ft. in Q3 2020.
The
country is expected to witness deeper penetration, throughout 2021 and
beyond, the flex space market is forecast to grow
at a slower pace and more organically. Irrespective of several
short-term disruptions and challenges, increased demand from large
enterprises, will support the growth of the flex space market to more
than 50 million sq. ft. by 2023. It is anticipated that
flexible space will grow by an average of around 15-20% per annum over
the next three-to-four years, although this trajectory will not be
linear. Previously expected levels of new investment are unlikely to be
seen, as operators look to solidify their existing
operations and it is likely that certain operators will not be able to
weather the storm.
As
corporates return to the workplace, they are likely to further leverage
flexible space to reduce capital expenditure and create cost savings,
while allowing for
split teams and de-densification requirements. Developments that
initially drove the growth of the flex market, like the focus on
utilizing workplaces to boost productivity and drive dynamic work
cultures, enhance emphasis on employee health etc., will continue
to influence the next phase in India.
“While
the flex-space market more than tripled in the last 3 years, the
momentum going ahead will be relatively slower. Players are likely to
tread cautiously, and
the overall market is expected to expand 1.5 times from the current
size. At the same time, demand for flexible space is likely to remain
resilient and we expect the size of the flex space market to cross 50
million sq. ft. by 2023, led by increased demand
from larger enterprises,” Dr Samantak Das, Chief Economist and Head of Research & REIS, JLL India.
In
the commercial real estate space, flex spaces have become synonymous
with adaptability. As preferences evolve, a range of flexible space
options have taken shape
to suit changing business needs, including remote working. To respond
to the current disruption, and to lay the groundwork to deal with what
may be permanent changes for the industry, flex space operators have
been agile and are recalibrating their business
strategies. They are now laying a greater emphasis on profitability and
evolving strategies to ensure stable occupancy levels in their flex
space centres.
Large enterprises to drive demand
The
densification trend that had emerged over the last decade will likely
reverse with enterprises leaning on flexible office space to relax space
density. Large
enterprises might also look at splitting up their offices to reduce
commute times and dependence on public transport. However, with expected
economic uncertainty, companies will be hesitant to commit large
capital to real estate. In terms of strategy, leasing
directly to a third-party flexible space operator is the most widely
adopted model. A partnership model allows both landlords and operators
to leverage each other’s strengths. There are several ways to implement a
partnership, with revenue shares and management
contracts being the most common. Under the revenue share option, both
parties split the upside. In the case of a management contract, the
operator gets a fixed payment, while the landlord assumes all the
leasing risk and enjoys the upside. Despite the benefits
of this approach, partnerships are relatively less common in India for
now.
What the future holds
The
entry of more than 300 flex space operators into the country helped
commoditize the market. Prior to the pandemic, most of these operators
were focused on attaining
scale and capturing market share. However, the availability of capital,
in the current scenario, will be a challenge. Players who have embarked
on aggressive growth so far will find themselves strapped for capital.
In such a scenario, the market is likely
to witness consolidation activity driven by larger operators with
financial wherewithal acquiring smaller ones.
Flexible workplaces will
continue to be a major influence on the future direction of the Indian
office market. There will be an even greater focus
on providing customized office space solutions and demand for flexible
space will not only return but increase, as occupiers embrace the core
plus flex model more widely. Despite the massive disruption from the
impact of COVID-19, the future of flexible workspaces
will remain optimistic.
