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Rahul Jain

Did the second wave of Covid-19 impact office real estate adversely?

Since the onset of second wave of Covid-19, a lot of questions are being raised about the state of office real estate. While I understand the reason why such questions are being raised, it is also important to look at the ground realities. Hence, when Embassy Office Park REIT (Embassy REIT) declared its Apr-Jun ’21 results, I thought it may be a good idea to look at some publicly available facts stated in the results in order to dispel some of the fears about the impact of Covid-19 on the office markets.


Fear #1


A lot of tenants have stopped paying rents during the second wave.




Office rent collections for the Embassy REIT remained high at over 99% on its 32.3 million square feet (msf) of operating portfolio. More importantly, no rent rebates were given to the office occupiers.


Fear #2


Second wave has led to a surge in vacancies.




Occupancy for the REIT in Apr-Jun’21 quarter remained flat at 89% as compared to Jan-Mar’21 quarter.


Fear #3


Asset owners have lost their bargaining power and are re-leasing assets at much lower prices




While the Embassy REIT management expects 1.4 msf of its 1.9 msf of lease expiries in FY22 to be exited, they expect 83% mark-to-market (MTM) potential in these leases. In comparison, MTM potential is 1% in 0.1 msf of leases which are likely to be renewed and the remaining 0.4 msf of lease expiries have been renewed at 10% spread in the first quarter. The Embassy REIT management also confirmed in the earnings call, that it is comfortable with the exits due to the high MTM potential while re-leasing.


In my humble opinion, while people may have these fears due to various reasons, data suggests that the commercial real estate, especially the segment in which Embassy REIT operates in, i.e. Grade A offices leased out to high quality companies, has been highly resilient of the second wave of Covid-19.


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