The Cornerstones of Commercial Real Estate: Part 1

Dear Readers,

Welcome! Over the past three and a half years there are many adjectives that can be used to describe Legion’s journey. Memorable, exhilarating, gut-wrenching, fulfilling, arduous, and passionate are just some of words that come to our mind. All along this journey, through the good and the not-so-good times, the one thing remained constant was Knowledge Gathering. And thanks to our families, some very close friends, colleagues, clients and well-wishers, we hope to make our humble contribution to the vast ocean of knowledge that exists in the field of Real Estate through this medium. True to our specialty, we will focus primarily on Commercial Real Estate (CoRe).

Like any other industry, Real Estate in our country has and continues to evolve rapidly. And within Real Estate, Commercial Real Estate has experienced some serious ebbs and flows. Over the past decade we’ve witnessed, unprecedented growth, radical drops, recession, rapid recovery, stabilization, innovation, adaptation, downfalls, and any other trend that is visible in business cycles. One things for sure though, Commercial Real Estate is here to stay.

So where do we start then? There’s just so much happening in CoRe that it makes it difficult to pinpoint any one aspect that warrants more attention than the others. In any case in order to simplify things, let’s get generic. Let’s start with the absolute three cornerstones of CoRe.

A) The Occupier

B) The Developer

and C) The Investor

Occupiers are popularly known as Tenants or End-users and are the main contributors to the demand. They come in all shapes and sizes ranging from Start-ups to massive Multi-national Corporations, from Cafés to Food court operators, from Banks to Retail Stores, from Domestic to International companies. In the Concrete Jungle, Occupiers can be categorized into three distinct types:

a)      The Elephants:  These are large companies with an enormous appetite for adding space to their ever-growing Real Estate portfolios. They include companies several Fortune 500 IT companies who outsource their Technology needs to India either through their own captive unit or through a third party. Statistics reveal that the top 20 companies account for more than 80% of the total office space absorbed in a year. Considering that India absorbs close to 35Mn sft to 40Mn sft in a single year, that number would amount to 28Mn to 30Mn. That’s a staggering number. The Elephants more often than not form the bedrock for a Developer to develop quality office space.

All Elephants have elaborate processes that are set in motion by various specialist teams that evaluate a particular project from all perceivable angles including stringent Environment, Health and Safety (EHS) Norms; Statutory compliances; Business Continuity Risks; Business Scalability; Employee Accessibility; And of course running complex Financial Models to check the viability of the project. Compliance to these norms by the Developer gives confidence with regard to the marketability of the project by bringing in relatively smaller players. Smaller, yes! Less important, No! Which brings us to our next category of occupiers i.e The Big Cats.

b)      The Big Cats:   In the natural world, the Big cats are the apex predators in the Jungle. However, in the Concrete Jungle, One can refer to companies that are powerful in terms of their presence but not necessarily in terms of size. They may be far smaller in comparison to the Elephants but they still occupy large spaces, are distinctly territorial and most importantly form a major attraction for the Developer. Mid-Size IT firms form the largest chunk in this category. Here again, they may be either Captive Units, Product Companies, Engineering and Design services, Research and Development Wings of their parent firms or third party service providers who compete in niche areas.

Decision-making in these organisations are generally centralized and quite often taken overseas. They are as elaborate as the Elephants and sometimes even more stringent. For a developer, they are the marquee names that would add a combination of quality and quantity to the IT Park.

c)      Springboks: I could use the term Deer but the South African Counterpart sounds a lot more lively. Springboks are the equivalent of Small and Medium Enterprises (SME). They aren’t all that small actually. These companies are typically the ones who have been around for a while, their growth has been steady but not feverish. They have their client bases well set and continue to survive rather than thrive. Having said that, these companies become mouth-watering propositions for the Big Cats to acquire at some point (Just like in the Jungle, the predators hunt the prey).

Springboks are harmonious in nature. They are not looking for back-breaking (from the developer’s point of view) deals. They are happy to be in a project that houses their basic needs. They don’t fall into the overly ambitious category. Mostly these are third party providers who tend to win relatively smaller contracts from the larger corporations who prefer hedging their risks.

d)      Rabbits: Rabbits are true their Natural Counterparts. They are fleet-footed, timid to an extent, and grow (read breed) quickly. They are usually the clients that ‘fill’ in smaller spaces in a particular project and are extremely price sensitive. Mostly, companies that are under 5 years old tend to fall into this category. They seldom have the negotiating power of the previous two categories however, their contribution enhances the average rentals of a particular project. Being small and flexible, these companies tend to grow into multiple locations as their business may demand before reaching a critical mass in order to consolidate.

Decision-making in Rabbits is very nuclear and sometimes even single dimensional. They are mostly entrepreneurial in nature hence requiring much less turnaround time. They are cost sensitive when it comes to investing in their interiors or ‘fitting out’ the space and tend to look for innovative means to save on their expenses.

As some of you may notice, I have generously borrowed the terms Elephants and Rabbits from my mentor and Guide Subroto Bagchi’s book The Elephant Catchers. I do hope the above article helps you gain a marginally better overview of one of the cornerstones of Commercial Real Estate.  We would love to hear from you. Drop in your feedback in the comments column below or email us @ discuss@legion.co.in. Thank you for dropping by.