The COVID-19 pandemic made hybrid work environments, work-from-home or a work-from-anywhere model possible, especially for the Information Technology and Information Enabled Services (IT/ITeS) sectors. Post the pandemic, IT companies that have operations in major cities, are finding it difficult to bring employees back to offices and are now looking to go to smaller cities to retain talent.
As per data available on the website of Guidance Tamil Nadu, the State’s nodal investment agency, the IT/ITeS sector provides direct employment to nearly 6,61,000 people in T.N., and accounts for 11% of the share of total investments in this sector in India.
Recently, IT major Cognizant said that in the post-pandemic era of hybrid and redistributed work, it is looking to rationalise workspaces, especially in India’s largest cities, by redistributing some real estate to smaller cities. This structural shift would help eliminate 80,000 work stations and 11 million square-feet of work space in large cities in India, it said.
Cognizant, which has a major presence in Chennai and Coimbatore with over 80,000 employees, said it will also invest in collaboration spaces in smaller cities across India and with this, it expects to reduce its annual real estate costs by about USD 100 million by 2025, compared to 2022.
Industry officials confirmed that many IT companies are looking at shifting some of their operations to smaller towns to retain talent, bring down attrition levels and also to save costs amid an uncertain global demand environment.
The Zoho Corporation’s facility in Mathalampaarai near Tenkasi | Photo Credit: SPECIAL ARRANGEMENT
One successful company, which moved early on into a small town, is Zoho. “We opened our first rural office in Tenkasi in 2011 to support our conviction that you don’t have to be in Silicon Valley to build world-class software. That conviction was validated when we launched Zoho Desk, our help-desk software, from there in 2016,” Praval Singh, vice president, Zoho Corp, said.
“In 2020, when our employees started working from their hometowns during the pandemic, we expanded our rural revival efforts and have now opened over 30 spoke offices across India, largely in tier 2/3 towns and villages from where our employees hail,” Mr. Singh said. “In 2021, we commissioned a study to study the impact our presence in Tenkasi has had over the past decade. The study revealed that there were several areas of positive impacts including growth in overall income, women empowerment, education and skill-building, employment, and community development,” he added.
Mr. Singh said one of the major reasons to go to smaller cities and villages was to take opportunities where the talent-pool was. “These regions are rich in talent, but unfortunately face a talent drain to overcrowded metros, given the lack of opportunities. Secondly, this allows us to keep costs of operations low, enabling us to invest more in our people and in Research and Development. We pass on these savings to our customers by keeping our software costs reasonable, even as we enhance the depth and breadth of our offerings, thereby offering them greater value,” he explained.
“After the pandemic, we have seen this trend pick up. In fact, companies, both large and small, are moving to smaller towns. We have also seen startups and small businesses from tier 2/3 cities flourish and make their mark,” he said.
Moving back to hometowns
During the COVID-19 pandemic, a big chunk of employees of IT companies went back to their hometowns, and their roots. They rediscovered the charm of staying closer to where they grew up, and are not very excited about coming back to larger cities for work, given the scale up in costs, daily commutes and additional expenses. In smaller towns, they get to save more in terms of rental costs, alongside reaping other social benefits.
An ELCOT promoted IT Park in Ilanthaikulam in Madurai | Photo Credit: ASHOK R
Retention rates in smaller towns are also higher, said Aditya Narayan Mishra, chief executive officer, Ciel HR Services, a holistic talent solutions company operating from 51 cities in India. This trend should be encouraged by all stakeholders including the government, he said, as it would also help in the development of smaller cities that can then can then try to get to the levels of Chennai, in terms of infrastructure. There could easily be 15 such cities in Tamil Nadu that could be developed, he said.
Tamil Nadu Finance Minister Thangam Thennarasu, who was handling the industries portfolio until recently, said a majority of the workforce comes from Tier-II cities and rural areas. The State government is setting up mini tidal parks in smaller cities to enable this push, he pointed out.
As per the Tamil Nadu Budget for 2023-24, the government is setting up seven mini-Tidel parks across the State to promote growth of the IT and ITes Sector in Tier II cities. IT parks, each with an approximate built-up area of 1 lakh sq.ft, will be set up at Erode, Tirunelveli and Chengalpattu. These parks will provide employment opportunities for 4,000 persons, the Budget stated.
In the recently-concluded T.N. Legislative Assembly session, Mr. Thennarasu had announced that a state-of-the-art IT park with about 10 lakh sq.ft. would be established in Panjappur near Tiruchi. The project is expected to create about 10,000 jobs. He also said two mini-IT parks would be set up in Karaikudi and Rasipuram at a cost of ₹35 crore each. These IT parks will have a space of about 50,000 sq.ft. each.
Flex spaces outside of Chennai
In terms of towns outside of Chennai in Tamil Nadu, Coimbatore has the best office space after Chennai, followed by other towns like Tiruchi and Madurai, Anup Vasanth, managing director – Chennai, Savills India, a real estate consultancy firm, said.
A corporate office in Coimbatore. The city has the best office spaces in T.N. outside of Chennai. File | Photo Credit: File
However, most of the quality supply of real estate in these smaller towns has reduced over the last 24 months due to high demand from IT occupiers. Coimbatore, for instance, has witnessed a heightened demand for space from flex operators as well, he said.
Savills, in its report titled ‘Tech Towns of the Future,’ had identified various towns across the country including Coimbatore, Kochi, Mangalore, Mysore, Thiruvananthapuram, Tiruchi, Vijayawada, and Visakhapatnam, among others for growth potential.
It’s worth noting that the expansion need not be seen only as State-specific. An entire region like south India could become a viable catchment for such towns, Mr. Vasanth said.
“Flex spaces are being considered by businesses that are expanding into new markets or experimenting with new workplaces or designs. One of the primary entry points for occupiers into Tier 2 and 3 markets is flex, which is one of the key elements for big occupiers looking to fit their hub-and-spoke models, and adaptable networks,” said Anshuman Magazine, chairman & CEO - India, South-East Asia, Middle East & Africa, CBRE, a real estate consultancy firm.
“With the rise of remote work and hybrid work models, many companies are looking to reduce costs by downsizing their office spaces in larger cities and establishing satellite offices in smaller cities. During the pandemic, due to reverse migration, a lot of large enterprises recalibrated their real estate portfolio to include office spaces in tier 2 cities,” Amit Ramani, founder and CEO, Awfis, a flex workspace provider said.
In smaller cities, co-working spaces can provide businesses with access to high-quality office space in Grade A buildings with amenities at a fraction of the cost of renting or owning a dedicated office, he said.
The impact on Chennai
Commercial real estate players said this trend of moving to smaller towns, would not have a big impact on bigger cities like Chennai.
There has been a significant increase in newer companies looking at Chennai as an alternative/additional city for their India operations, Ritesh Sachdev, senior vice president & head – commercial leasing and asset management, Tata Realty & Infrastructure Ltd (TRIL), said. TRIL runs the Ramanujan Intellion Park in Chennai, located in Taramani’s IT corridor.
Relocation to Tier II cities is very limited, and these locations are being sought after to establish satellite offices under hub and spoke models, to attract the workforce from these towns. The trend to move to smaller cities is essentially to tap into talent, and bring employees back to offices, given the supply-demand gap of talent. The scale of relocation continues to be limited, and therefore, will not have a huge impact in leasing of Tier I cities, he pointed out.
Given the continued demand in Tier I markets, Intellion Offices by Tata Realty will continue to build commercial office assets in Tier 1 Cities only, Mr. Sachdev added.
The Chennai Metropolitan Development Authority has mature rules in Chennai, which are not applicable in other cities. Global occupiers will continue to see risks in terms of safety and security, and may need to compromise on environmental, social, and governance (ESG) standards while operating from smaller towns. Flex operators will play a big role in assuming risks associated with Grade B and Grade B minus buildings in these towns, he said.
“Given the continued demand, we don’t see the risk of the IT/ITeS sector reducing demand in Tier 1 Cities. However, various sectors including banking, financial services and insurance (BFSI), engineering and manufacturing, pharma, semi-conductors, R&D and other sectors will continue to support the market dynamics. For example, in the first quarter of the calendar year 2023, BFSI contributed 37% of gross absorption in Chennai, which was about double of IT/ITeS absorption due the same period, Mr. Sachdev added.
Though quality office spaces might be available in Tier 2 cities, air connectivity and social infrastructure make Tier 1 cities more lucrative for IT companies. Last year, the office space absorption in Chennai was close to 6 million square feet, while market information shows that in the first quarter of the current calendar year, it has already clocked 2 million sq ft. This gives a positive impetus that the office space demand is still heading north, Hrishikesh Nair, chief operating officer, Chennai Operations, Brigade Group, a real estate and property development firm, said.
The World Trade Centre in Perungudi, Chennai, a joint venture between Brigade Group and GIC. File | Photo Credit: BIJOY GHOSH
Brigade Group runs the World Trade Center, Perungudi in a joint venture with GIC (Singapore Investment Corporation).
Chennai has access to talented talent, improved infrastructure and a good social life. The combination of a robust economy, infrastructure, being a business hub, a skilled workforce, and favorable government policies make Chennai a highly favourable location for commercial property investments, according to Niranjan Hiranandani, chairman and managing director, Hiranandani Communities, a construction comany.
Minister Mr. Thennarasu said that with the presence of institutions such as the Indian Institute of Technology-Madras (IIT-M) andAnna University, a lot of global players are looking at Chennai as a potential location for areas such as quantum computing and other advanced technologies.
Only a section of office/commercial operations would be shifted to smaller cities. Once this process begins, quality office space will get built up in cities like Coimbatore, Tiruchi and Madurai, S. Sridharan, national vice president, South Zone, Confederation of Real Estate Developers Associations of India, said.
A lot of start-ups and IT companies are looking for quality space. The current Chennai Metro Rail connectivity and its expansion plans have made a huge difference in terms of connectivity in Chennai. This, coupled with aggressive infrastructure growth being taken up by the State government has been a big boost to the commercial real estate sector, he said.
Challenges in smaller towns
Despite reverse migration and the setting up of infrastructure, the challenge for expansion in smaller cities, lies in attracting a talent pool. Employees aspire to migrate to larger cities, seeking better professional opportunities and career growth, Sanjay Chugh, city head and senior vice president, ANAROCK Property Consultants Pvt. Ltd, said. Experts also point to issues of cybersecurity and moonlighting as major challenges in a shift of workspaces to smaller towns.
Chennai has the availability of good quality grade office space with new supply being added year on year. The availability of such spaces may be a challenge in Tier 2 and 3 cities. Apart from good physical infrastructure Chennai also has the advantage of high-speed data connectivity through the undersea cable network, he said.
In the last few years, Cognizant has given up some of its leased properties in Chennai. A significant portion of these spaces have already been leased to IT occupiers, and the remaining spaces will likely be leased as well, given their prime real estate locations, Mr. Vasanth from Savills, said.
