India’s flex space is expected to see major expansion in Tier-II cities in the coming years. According to a JLL-Awfis Report titled “Flex your Workplace”, 48% of respondents/occupiers who already have a presence in Tier-II cities want to further expand. Not just that, 78% of these occupiers are expected to expand within the next one year, with 84% wanting to utilise flex spaces. The story is almost similar for players who do not yet have a presence in Tier-II cities. Even among those who did not have a Tier-II city office footprint, 34% of companies had employees working from such locations. While 47% of the respondents had a presence in Tier-II cities, one-third of those were medium to large companies with employee strength of 3,000 or more. Increasingly, domestic tech firms who are targeting the interiors and cities/towns beyond the metros for business expansion opportunities are looking to create regional offices. Such growth plans will need flex operators as they will become the enablers for providing quality workspaces with quick turnaround time for such organisations.
“Times have changed, so have offices. Today’s offices are more flexible and can accommodate the changing needs of their employees. Going flex or hybrid is one way to ensure that talent stays. Through the pandemic, flex has remained resilient. Given the new realities, it’s now a crucial part of occupier real estate strategies. While 75% of the flex portfolio, on average, is still in Tier-I cities, the hybrid model is fostering growth of flex operators in Tier-II cities as well. We expect demand for flex spaces to continue to rise in the metros, and the Tier-II cities will witness tremendous growth. Driven by reverse migration, focus on talent across regions and cost of living, the Tier-II market is perfectly poised to witness a significant upswing in hybrid workplaces,” said Radha Dhir, CEO and Country Head, India, JLL.
Large enterprises have accounted for 50% of the demand for flex seats in the last couple of years. This demand driver will be key to the market’s continued growth as enterprises look towards portfolio optimisation due to changing employee needs which are driven by flexibility in work patterns. The average lease size has been in a steady range of between 52,000-56,000 sq. ft over the past four years. While leasing volumes tapered off in 2020 and 2021, enterprise-led flex deals ensured that transaction sizes remained within range. The average deal sizes for enterprise providers were 15-20% higher than the overall average.
“India’s flex space footprint across the top seven cities has grown by 525% over the past five years and now stands at 38 million sq. ft with operational flex seats exceeding 550,000. Even during COVID, while 5 million sq. ft of flex space was closed, the segment has reinvented itself and the growth is now being fuelled by enterprise demand for managed workspaces,” said Samantak Das, Chief Economist and Head of Research & REIS (India), JLL. “Our survey results also show that Tier-II cities are gaining momentum with occupiers looking to enhance their presence, given the business opportunity in the interiors and talent availability in these cities with the reverse migration seen post-COVID,” he added.
The total flex stock is at 38 million sq. ft which includes over 5,50,000 operational seats. Among the top-7 cities, Bengaluru is the clear leader accounting for 34% of the total flex stock. Large enterprise deals, over 1000 seats, account for about 36% of total market activity since 2020.
The current flex market penetration in total office stock of top-7 cities stands at 3.5%. India’s average penetration rate for the top-7 cities could reach around the 4.0-4.5% mark over the next two years. This will largely be driven by Bengaluru which is already at par with more mature markets with a 5% penetration rate and other gateway cities such as Mumbai and NCR which have witnessed healthy growth. Pune and Hyderabad will also see remarkable growth in coming years.
With COVID being the chief reason, 2020 saw only 4.4 million sq. ft added to the flex stock, down by 58% in terms of activity levels. The second wave in 2021 also impacted the market and it will close out on similar number as of 2020. However, the growth plans seen over the past two quarters bode well for the sector’s growth. The share of flex space in total Grade A office space leasing in the top-7 cities in 2019 hit a high of 16%, a year of historic highs for the Indian office markets. It dipped to 9% in 2020, before reaching 13% again in the first three quarters of 2021, though the absolute numbers remain off the previous highs.
“For a variety of motivations including the need for shorter leases, an ever more mobile workforce and greater caution by companies in making capital expenditures, tenants are increasingly requiring flexibility in lease terms, especially as they await greater clarity in business conditions and workplace strategies. With the pandemic exacerbating uncertainty, tenant sentiment now indicates that flexible space adoption is set to accelerate substantially as demand shifts from fixed long-term commitments to more agile and hybrid options. This shift toward greater flexible space requirements is seen as a structural trend and not just in response to the pandemic, and landlords will need to adapt to tenant demands for increased flexibility. Moving forward, flexible workspace is likely to grow from a low proportion of the overall market to a critical and mainstream element of commercial real estate,” said Amit Ramani, Founder and CEO, Awfis.
The events of the past 24 months have had a seminal impact on the way we will live, work and play. The silent change revolution currently ongoing in the workplace and driven by employees exercising their choice will direct the course of the flex space market as well. With occupiers looking at their real estate portfolios in terms of cost optimisation and also integrating greater tech and sustainability features, flex spaces will also keep pace with such demands. Flex operators who have achieved scale and adequate funding will be at the forefront of driving portfolio synergies for both occupiers and landlords.
