Office Market Update: India Sees Demand Dip with New Peaks in 3 Cities

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    In the first half of 2023, India’s commercial real estate sector, spanning key office markets such as Bengaluru, Chennai, Delhi-NCR, Hyderabad, Mumbai, and Pune, experienced a 12% decline in gross absorption compared to the same period in the previous year, settling at 27.0 million square feet. This trend suggests a quarterly minimum resistance level, indicating stability and potential future growth, with an average of around 13.7 million square feet absorbed over the last six quarters.

    Demand Dynamics

    While the Information Technology (IT) sector remained the primary driver of office demand, a noteworthy shift was observed as demand diversified across sectors. Flexible workspaces emerged as a robust contributor to office demand, ranking second. However, the commercial real estate sector did not remain completely insulated from global economic headwinds, with select organizations downsizing and some regions facing technical recessions. A visible slowdown in office demand occurred in H1 2023, marked by a 14% decline in the first quarter compared to the previous year, followed by a 9% year-on-year contraction in the second quarter. Factors such as portfolio optimization, delayed decision-making, and the availability of plug-and-play/coworking office spaces within a widely accepted hybrid work environment contributed to this deceleration. Nevertheless, India’s appeal to corporates remains strong, driven by robust GDP growth, a substantial talent pool, favorable policies, and ongoing infrastructure development. Consequently, this temporary reduction in leasing activity is anticipated to gain momentum in the second half of the year.

    City Rankings

    Bengaluru, Chennai, and Delhi-NCR retained their positions as the top three performing cities in H1 2023, collectively accounting for 63% of gross leasing activity. These cities also witnessed a new leasing peak, marking a decade-long record in gross absorption. Bengaluru, while still leading, experienced a notable 39% decline in leasing activity, primarily attributed to cautious decision-making by technology companies amid global economic uncertainties. Mumbai and Pune also reported declines in leasing activity, with reductions of 9% and 11%, respectively, compared to the previous year.

    Sectoral Contribution

    Several sectors significantly contributed to leasing activity during H1 2023:

    • IT: Recorded a robust 31.6% year-on-year growth.
    • Engineering & Manufacturing: Grew by 7.8%.
    • Energy & Chemicals: Saw a 5.4% increase.
    • BFSI (Banking, Financial Services, and Insurance): Experienced remarkable 70% year-on-year growth, accounting for 14.4% of leasing activity.

    Deal Size Distribution

    Large and medium-sized deals, defined as those exceeding 100,000 square feet and ranging between 25,001 and 99,999 square feet, constituted a substantial 83.5% share of the market. Compared to the previous year, the share of large deals increased from 41% to approximately 48%, signifying a preference for larger office spaces among occupiers. Large deals dominated the market across most cities, except Mumbai, which saw a predominance of small-sized deals below 25,000 square feet.

    Rental Trends

    With the exception of Southern cities, all markets witnessed changes in average rental values in H1 2023. Mumbai reported the highest rental growth of approximately 16% year-on-year, primarily due to limited space availability. Meanwhile, Delhi-NCR and Pune experienced marginal increases of 3% and 2% year-on-year, respectively.

    Supply and Vacancy

    In H1 2023, new office space completions amounted to 25.6 million square feet, reflecting a 16% decrease compared to the same period in the previous year. Most cities, except Delhi-NCR and Hyderabad, saw a year-on-year decline in new supply. Bengaluru led in new completions, contributing 8.2 million square feet, followed by Hyderabad with 7.6 million square feet. The southern cities of Bengaluru, Chennai, and Hyderabad collectively accounted for 72% of the new supply in H1 2023. On a pan-India scale, average vacancy levels showed a marginal decline, decreasing by 20 basis points to 18% by the end of Q2 2023.

    Large Deals Dominate

    Large and medium-sized deals comprised a significant portion of the market, accounting for 83.5% of all deals. The share of large deals increased compared to the previous year, highlighting the preference for larger office spaces among occupiers. These larger deals dominated the market in most cities, with the exception of Mumbai, where small-sized deals below 25,000 square feet were more prevalent.

    The dynamics of India’s commercial real estate sector in H1 2023 underscore the resilience and adaptability of the market amid global economic challenges, with diverse sectors contributing to leasing activity and several cities achieving notable milestones in office demand.

    Also read: Delhi-NCR Dominates Real Estate Growth: Highest Rise in Housing Prices Among Top Indian Cities

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