‘Flexibility Driving Its Growth': Commercial Real Estate Expert Viral Desai On Boom Of Flex Spaces

India's commercial real estate has witnessed significant growth and expansion over the last few years.  As a key driver of employment, investment, and infrastructure development, it plays a crucial role in the country's economic growth. 

India-facing businesses are on an upswing and are looking to build a corporate presence. Managed or flex space service providers are looking to capture this opportunity. 

The Core's founder Govindraj Ethiraj spoke to commercial real estate expert Viral Desai on the changing landscape of India's commercial real estate scenario and how choosing flex spaces is changing the notion of what constitutes office space in today's time. 

Among several factors pushing the growth of flex spaces are the new businesses. "There is uncertainty. They don't want a large Capital Expenditure (CapEx) and are happier on shorter leases. So, they take up space with the managed service provider. They are filling that gap between the developer and the occupier by providing end-to-end services," Desai said, noting that conventional space occupiers too are preferring to move to managed spaces. 

Flex spaces are a growing segment across the country, according to Desai, and about 25% of the space taken up is with managed service providers. 

Here are the edited excerpts of the interview: 

 

What are the trends in the commercial real estate space which have stood out in the last six months compared to the previous periods?

In the last six months, given the global economic backdrop, much to everybody's surprise, office markets have held up very well. Some key insights we are now observing follow the global trajectory.  We map commercial real estate demand into four buckets-demand from India-facing businesses, third-party IT services firms, global capability centres, and managed office space. 

The first bucket India facing business refers to Indian companies taking space to service their Indian consumers and all the businesses that take space to service Indian consumers. Third-party IT service firms-Indian and multinational-that undertake jobs for global MNCs and follow an outsourcing model form the second bucket. The third category comprises global capability centres (GCCs) of multinational firms-technology centres of global companies set up in India to service their needs. And the last is managed or flex service providers who take space on lease. It is interesting to note that each of the other three buckets takes space within these too. 

The Indian economy is doing well and hence the share of space taken up by the Indian-facing business segment has increased dramatically. We saw that trend play out in the last six months and it is likely to continue. Further, it is anticipated that more manufacturing will follow suit and so the outlook is strong for India-facing businesses taking more space. 

The second big trend is that third-party IT services firms, which were essentially the drivers of commercial real estate over the last 30 years, have taken a backseat. This is because of the slowdown in global multinational companies, which in turn service various sectors. So their share of commercial real estate has gone down.

 

In your opinion, which are the top three sectors-within India facing business–in an expansionary mode?

At this point in time, India is firing across sectors. Banks are taking up a lot of space. I would say generally, manufacturing companies are taking corporate space for their corporate headquarters. If you ask me, it is actually well-spread because if you have defense, aerospace, and retail doing well, banks do very well because they sort of represent the basket of the economy. 

 

You spoke about many taking corporate headquarters. Are you seeing a consolidation within India facing businesses in terms of the way they are coming together?

It's actually growth-driven, and consolidation is a part of the strategy. Companies have been cautious in the past and have taken space as and when they require it. Now, they are looking at a brighter outlook and have greater visibility of how the future would pan out. So, it's a combination of expansion and consolidation of space.

Let's also remember that in the last three years, while the India-facing business has had almost 100% return to the office, the technology sector is still lagging behind on that front. There is more hiring anticipated and there are other drivers with respect to quality upgrades and harnessing talent. Again, it is a combination of several aspects, but primarily for India-facing business, it has been expansion-led space takeup. 

 

The new interesting figure seems to be Flex Spaces, and that has grown tremendously. Why is the demand for flex spaces growing, and will that trend continue?

Flex Spaces is now a sub-segment of commercial real estate and two aspects are fundamentally driving its growth. The first is a conventional space occupier-could be any business-who for various reasons wants a certain portion to move into a flex or managed office. So that's one growth driver--conventional moving to managed spaces. 

The second is a new business. So there is uncertainty. They don't want a large CapEx and are happier on shorter leases. So, they take up space with the managed service provider. Managed service providers are filling that gap between the developer and the occupier by providing end-to-end service. 

It is a growing segment today across the country, and about 25% of all space taken up perhaps is with managed service providers. This segment presently thrives because the environment is volatile and dynamic, but from a long-term standpoint, it's actually a solution. If someone can give you everything, then why not take it up?

 

On the one hand, you have India facing businesses expanding with concrete presence, and on the other, the smaller companies are going for the flex solution because it offers flexibility.

You're absolutely right. In my opinion, flexibility is a huge factor driving the growth of flex office space, given how the markets are today. However, I would also highlight that an occupier needs to first lease space, fit it out and then manage. In contrast, if they get a bundled solution, maybe it is a matter of how they look at their cash flows, the prospect of outsourcing this element and getting a single solution is another driver for growth for managed or flex operators.