Malls morph into offices

Malls morph into offices
The Hindu Business Line, February 08, 2009, Page15
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Faced with oversupply, developers are converting retail projects into commercial office space.
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Moumita Bakhi Chatterjee

As major retailers slam brakes on heady expansion plans opting, instead, for selective rollouts, real-estate developers — faced with a mall oversupply situation — are switching gears and converting retail projects into commercial office space.

“There is a clear oversupply situation in the market today, when it comes to malls. Retailers are facing a tough time, given the liquidity pressure arising from slowing sales, and have started closing stores that are economically unviable and are becoming choosy about taking up new space.

Project conversion
“Also, in certain cases, the mall locations were not well-thought-out and the catchment areas, weak. As a result there have been no takers for such locations,” says DTZ Director, Mr Rajeev Bairathi, adding that demand-supply imbalance in retail space was prompting developers to go for project conversion after seeking required approvals, based on ‘zoning’.

JMD Group, last year, altered its plans for a mall spread over 3.5 lakh sq.ft in Gurgaon and turned in into ‘Corporate Suites’, a sprawling office space. “Malls are already in excess supply. We also felt that the maintenance overheads were working out to be higher for us, in the case of retail space. But in an office space, these are generally taken care of by the corporate tenant,” says Mr Sunil Bedi, CMD, JMD Group.

That aside, while the retail demand has tanked in certain cities, the office market continues to attract ‘takers’, says Mr Brijesh Bhanote, Vice-President, Sales and Marketing, Vipul Ltd, a company which converted its project ‘Agora’ into office space sometime back. “We anticipated the oversupply situation nearly 18 months back, and accordingly decided to change ‘Agora’ into office space,” says Mr Bhanote.

According to Cushman & Wakefield, the actual mall supply in major cities in 2008 stood at only 9.7 million sq.ft, almost 54 per cent lower than the initial supply projection of 20.8 million sq.ft for the year. The scale-back in supply has been attributed to multiple reasons, one of them being developers’ acknowledgement of the current market reality in retail sector.”

“We are aware of 5-7 cases of project conversion. Retail space is being converted not only into office buildings, but also into hotel projects. This trend may continue in some markets for the coming quarters,” says Mr Rajneesh Mahajan, Executive Director of Retail Services, Cushman & Wakefield.

Natural choice
Market watchers say that for realtors looking at alternate uses for space initially earmarked for retail purposes, office is the natural choice. “In the current environment where consumer sentiments are weak and footfalls have slumped, retail occupants are shying away from committing high or fixed rentals and are looking to pay on the basis of performance of the store. Office rentals, on the other hand, are not based on revenue-share model,” they point out.

In certain cases, instead of a full makeover, developers are opting for the middle ground — that is, retaining the space on the ground floor for retail usage, while transforming the rest of the building into office space. Conversion to office, however, implies a hit on rentals; real estate development cost for retail space is higher as is the risk factor, hence margins tend to be better in case of retail projects.

“While the rentals vary from market to market, on an average the differential comes to 10-20 per cent. But that’s a chance that builders are taking, as they may not get full retail occupancy for the project. By turning it into office or hotel project, the developer ends up utilising the space. So the loss is only notional,” says Mr Mahajan of Cushman & Wakefield.

Common specifications
Retail-to-office conversion becomes a tad easier as certain specifications (such as the need for ample parking space), remain common to both. “Modular retail enclosures can be knocked-off to convert the area into free open space for office use,” say market observers.

However, Mr Raghav Gupta, President, Technopak, feels that while switching to an office space may be the “closest compromise” for developers who are stranded with an oversupply it brings its own set of challenges. “I believe that the retail space design is not optimally suited for office use. Also, the location is not optimal, as malls are generally conceptualised in high-traffic density areas,” adds Mr Gupta.