It is a well-known fact that India is world’s largest hub for global in-house centers (GICs), and Bengaluru accounts for almost 40% of the GICs in India. The city has nurtured a technology ecosystem with a focus on strong IT infrastructure, and a highly skilled and deep talent pool. It is the growth of the IT-BPM companies and technology giants that has propelled Bengaluru to become the largest office market, in terms of absorption.
Office space absorption in Bengaluru
During 2019, Bengaluru recorded gross absorption of about 15 million sq feet, with average annual absorption of 14.3 million sq feet between 2015 and 2019. Considering the spread of COVID-19 and the lockdown, we note that while gross absorption in 2020 is likely to come below our earlier estimates of 14 million sq feet, it will continue to see the highest leasing among the top seven cities in India. We believe the Bengaluru office market is resilient enough for a bounce back in 2021, led by the technology companies. In the new normal, world that emerges post COVID-19; we believe that IT and technology sector could be a silver lining with several verticals like cloud, cyber management, etc. gaining traction.
An evolved technology ecosystem in Bengaluru, added to the availability of employee base with strong expertise in technology bodes well for companies here. The city also has many higher education institutions, with an employability ratio of 24% for the IT sector. Moreover, Bengaluru is the fastest-growing city among key Asian cities and regions (as per Oxford Economics) and is the top location in Asia for starting tech operations. In the current pandemic too, Bengaluru is amongst the best placed with relatively fewer COVID positive cases, as compared to other metro cities, underpinning strong local governance. The state government has been proactive with active contract tracing, containing the total cases in the city. These aspects make a strong case for a quicker bounce back of the city. We look at how IT companies could steer commercial real estate activity in Bengaluru.
Contractual hiring makes a comeback in IT companies
Contrary to fears that IT companies may look to layoffs in the current economic scenario, we note that IT Companies are, in fact, looking to hire on a short-term basis. Demand in temporary hiring has risen three-to-four fold over the last few months, as per HR consultants and may surge as companies look to conserve cash. Consultants expect short-term hiring to increase over the next 12-18 months, in areas such a remote cyber management, artificial intelligence, etc.
IT companies are also eyeing buyouts of global technology centers, also known as captive centers. Consulting firm ANSR notes that there has been a surge in enquiries for captives. Low-cost BPO centers which are not central to the company’s strategic outlook, could be outsourced to third-party once again, as was the case after the global financial crisis in 2008-2009. In such a scenario, we do anticipate some surge in enquiries for offices from IT companies as they look to manage their real estate portfolio.
Will cost-conscious companies look to outsourcing?
According to a Zinnov survey conducted in the first half of April 2020 (when COVID was at its peak in the US), 96% of companies surveyed said they were thinking of cash/cost optimization. Of these, 55% were considering optimizing R&D costs through establishing new global R&D centers at low-cost locations or increasing talent at current centers or with global outsourcing partners.
As the global environment starts limping back to normalcy, businesses impacted in the US, UK and Europe, may be under financial pressure and look to cut costs. In order to contain costs, they could outsource and expand centers in low-cost locations like India, post the US presidential elections slated for 2020.
GICs in Bengaluru are increasingly undertaking high-end work like product engineering and innovation that are critical to their organization’s success. Bengaluru already has an ecosystem for GICs with companies such as Boeing, Goldman Sachs, Honeywell, Walmart, etc. In such a scenario, Bengaluru could see a huge opportunity if companies continue to expand for high-skilled, specialized capabilities. Besides technology companies, organizations from the engineering, energy and manufacturing sectors are also favoring Bengaluru.