office property market: Robust leasing, lower base help Q2 office space net absorption jump 185% year-on-year

Top seven property markets have recorded a 2.85 times on-year growth in net office absorption during the quarter ended June due to the combination of robust leasing activity and a lower base as a result of pandemic related mobility restrictions.

Total office space absorption in Mumbai, Bangalore, Delhi-NCR, Pune, Hyderabad, Chennai, and Kolkata increased 185% year on year to 8.5 million square feet.

Net absorption was led by Bangalore with a 48% share, followed by Mumbai and Delhi-NCR with near-identical shares of 16% each. These three cities accounted for 80% of total net absorption, showed data from JLL India.

There has been limited to no space downsizing activity by larger corporates during the quarter, continuing the trend visible over the past two-three quarters as greater certainty with controlled Covid19 infections fosters a hybrid return to the workplace trend.

“The technology segment saw its share rise to 33% from 25% sequentially, clearly outlining its continued dominance as the most prominent occupier segment in India’s office sector. Manufacturing and industrials continue to show impressive gains with a 13% share of market activity backed by India’s policy push yielding results in this segment. BFSI and Consulting segments held shares of 10% and 8%, respectively,” said Rahul Arora, Head of Office Leasing Advisory India & MD-Karnataka & Kerala, JLL India.

Flexible office spaces continue to make rapid strides as a major occupier segment, with its mainstreaming among occupier space strategies resulting in a share of 20% in quarterly leasing activity.

Flexible office leasing rose to 2.8 million sq ft in the June quarter, the highest in 12 quarters, and the first half of 2022 numbers are already 30% higher than the annual flex space take-up for both 2020 and 2021 individually, Arora highlighted.

The second quarter of 2022 witnessed the normalisation of supply with 11.1 million sq. ft. completed during the quarter across the top seven cities.

New completions were headlined by Hyderabad with a 42% share, Bangalore with a 39% share, and Delhi-NCR with a 13% contribution. The office markets of Chennai, Pune, and Kolkata saw no completions during the quarter.

“Over the next 12 months, 55–60 million sq ft of grade A office space is likely to be completed across the top seven cities. Of this, institutional and top developers account for a 72% share, and the current pre-commitment rate for the total 12-month forecast supply now stands at 17%. However, when we look at the superior grade supply by institutional players only, the pre-commitment rate rises to 31%,” said Samantak Das, chief economist, and head of research and REIS, India, JLL.

This, according to him, clearly signals the flight to quality assets by major occupiers and offices remaining central to their workplace strategies.

However, a slight weakening in the pre-commitment rate indicates a slowing demand momentum which may be visible over the next 6 to 12-month period and find effect over 2023, unless global headwinds start to ease.

Almost 45% of the new supply infusion was pre-committed during the quarter. A significant part of this came from new completions in Bangalore, where 95% of the quarterly supply was pre-committed.

Pre-commitment levels in Hyderabad and Mumbai were just 14% and 20%, respectively, signalling an impending cautious approach of occupiers due to the global headwinds and domestic countervailing factors which may see them evaluate their growth plans in a more fluid macroeconomic environment.

While both completions and net absorption were lower on a sequential basis, the pan-India vacancy dropped marginally by 10 basis points sequentially to 16%, given the slightly higher decline in new supply infusion.

While the headline vacancy may be a bit disconcerting, core office markets in the major cities continue to have tighter vacancy rates compared to the city’s overall numbers.

On account of zero supply additions during the quarter, Pune also witnessed lower net absorption, while Hyderabad saw lower net absorption due to poor pre-commitment rates in new completions.

Market activity was also characterised by more relocation and consolidation activity, while expansion-driven growth was slower. This is reflected in the higher gross leasing number not translating into a similar trend in net absorption.

Global economic headwinds and geopolitical issues have given rise to some concern about global growth forecasts. This may have some impact on occupiers’ growth plans and likely create some delays in real estate decision-making.

Experts believe some effects of this will be visible later this year or early next year. With back to the workplace in full swing, market activity is primed to remain robust, with demand for conventional space as well as flexible space slated to be more certain.

However, the return-to-work decision is not a binary one, and a hybrid steady-state is also emerging. This has enabled occupiers to formulate a hybrid real estate strategy as well.

India is expected to remain central to the country’s tech offshoring and outsourcing activities. With digital spending rising and cost measures likely to hold weight, India’s low real estate costs and vast talent pool are expected to keep the office sector in a healthy state over the next 12 months.

With occupiers in an active state, ongoing demand currently stands at 36-39 million sq ft across the top seven cities, higher than even pre-Covid levels. This active demand is representative of all major ongoing space requirements and deals that are in advanced stages of negotiation and closure.