Companies Opt For 'Flex' Office Space To Cut Costs

Amid adoption of hybrid work model and mass layoffs, companies have been looking at alternate options by cost cutting in non-core aspects of the business real estate and reducing office spaces.

One such example is global IT giant Cognizant, which announced recently that it would be reducing office spaces and cut down on its annual real estate cost by $100 million by 2025, as compared with its costs in calendar year 2022.

Technology companies have been leasing flex spaces due to the added benefits, such as flexible lease terms, lower capital expenditure and modern workplace designs. Coupled with ongoing recessionary conditions and layoffs in the sector, this has led to a relative pushback in conventional leasing by these occupiers.

Flex spaces are gaining attention as they are being considered by businesses that are expanding into new markets or experimenting with new workplaces or designs.

Flexible space, commonly known as flex space, is a mix of office, retail and industrial space, which is provided to businesses on a monthly or lease basis.

During the first quarter of 2023, nearly half of the leasing through large deals was for flexible spaces and by banking, financial services and insurance players, who remained committed to their expansion plans. Leasing by the BFSI segment surged, contributing to 14% of total leasing across the top six cities during the quarter, according to data by Colliers.

Share of the technology sector has declined steadily in the March quarter, as corporates continue to focus on building in operational efficiencies through a hybrid model, said Peush Jain, managing director of office services at Colliers India.

Hybrid working has not only impacted demand for conventional office spaces, but has also fuelled demand for flex spaces across top markets, Jain said. "The tech sector will continue to drive office leasing activity through a mix of conventional and flex spaces."

While the post-Covid run has been healthy, the office space supply and demand seems to be taking a breather now. Experts suggest the office segment has been showing signs of weakness since the second half of 2022, as the global economy was reeling under stress of a possible slowdown.

"As per World Bank, global growth is projected to slow to its third weakest pace in nearly three decades at 1.7% in 2023, overshadowed only by the 2009 and 2020 recessions," said Anuj Puri, chairperson at Anarock Property Consultant Pvt.

In this backdrop, the immediate recourse taken by global corporations is to go slow on hiring and real estate space addition, Puri said. "With weakening demand, the pre-commitments are lower and so the real estate developers also seem to be going slow on supply addition."

The tech enablement done during Covid-19 is helping not only the IT-ITeS companies, but also other sectors—including BFSI, consulting, manufacturing and others—to explore co-working spaces, reduce cost, and provide a hybrid work mode to the employee, according to Puri.

The office sector recovered from the pandemic lows in 2022 and office leasing in 2023 is expected to stabilise the post-pandemic resurgence.

Overall office gross absorption in 2021 across the top six cities was at about 33 million square feet, 10% higher in comparison with 2020, according to the Office Market Snapshot by Colliers.

In 2022, annual leasing touched record levels at 50.3 mn sq ft, led by leasing in the technology sector, flex operators and BFSI companies, which doubled during the year, whereas vacancy levels continued to decline amid robust demand.

During the January-March period, leasing volume in India's office space moderated as large occupiers' appetite for commercial real estate got constrained due to cost pressures in an uncertain economic environment, according to Colliers.

BFSI firms and flexible space operators took the lead, contrary to the previous quarters when technology corporations dominated the leasing share.

"Given the elevated fit-out costs and supply bottlenecks witnessed in 2022, capex savings and shorter turnaround times for handover would continue to attract occupiers' interest in flexible office spaces," said Anshuman Magazine of CBRE.

Magazine said companies are likely to view flex spaces as a hedge against headcount uncertainty.

"One of the primary entry points for occupiers into Tier 2 and 3 markets is flex; one of the key elements for big occupiers looking to fit their hub-and-spoke architectures and adaptable networks," he said.