Home / Markets / Mark To Market /  In office space sector, plenty of room for improvement

Indian companies are increasingly looking to move away from the work-from-home model with the adverse effects of the covid-19 pandemic waning. The re-adoption of work from office trends augurs well for office space demand.

Note that the information technology (IT) and IT-enabled services (ITeS) industries hold a vast share of Grade A office occupancies across key cities in India. In the June quarter, technology companies drove office leasing momentum with a share of about 31%, real estate consultancy firm CBRE said. It was followed by engineering and manufacturing companies (16%) and banking and financial services firms (12%).

Unfavourable dynamics
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Unfavourable dynamics

The commercial real estate sector was among the worst impacted by the pandemic. In recent quarters, crucial measurables such as occupancy levels and rentals have started to revive, but the pace of recovery has been unimpressive when compared to the hiring boom the Indian IT sector has seen.

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In the residential space, a supply glut after the effects of the pandemic reduced translated into faster exhaustion of ready inventory. However, that is not the case with commercial space. Supply has continued to come through, said an analyst with a domestic brokerage firm requesting anonymity.

“We feel that large tenant exits have already happened, but leasing activity is lagging expectations. Office space occupancies have improved, but with elevated supply, vacancy levels are yet to see a meaningful drop," he said.

The latest commentary by three real estate investment trust (REIT) managers listed on the Indian stock exchanges points to some portfolio exits. That said, new leasing and renewal of lease agreements by tenants are expected to buoy demand.

Embassy Office Parks REIT has scheduled expiries of 3.1 million sq ft (msf) in FY23, of which it expects to renew 1.9msf with 1.2msf of likely exits. For FY23, the Embassy REIT has retained its leasing guidance of 5msf.

The Indian commercial real estate office market saw record leasing in CY19 with an annual net absorption of 42msf, said a report by ICICI Securities Ltd dated 25 August. The pandemic meant CY20 and CY21 were weak. However, with net absorption inching higher from April, the domestic brokerage house estimates this parameter to reach 29.2msf in CY22 and 32.5msf in CY23. This compares with its earlier forecasts of 26.8msf and 30.0msf, respectively.

However, not all is hunky-dory for the sector. A key concern of the US-led global recession continues to haunt Indian IT companies. This could weigh on the spending decision of IT clients and, in turn, impact the leasing plans of technology services providers. Apart from that, with interest rates rising globally, the cost of borrowing for corporates is likely to increase, and that could also be a potential dampener for expansion plans.

“Large corporations in the IT and ITeS industry continue to scout for office spaces. That said, the robust hiring by top Indian IT companies in recent quarters has not translated into a huge increase in absorption levels yet. The overhang of a potential global recession seems to be at play here," said Viral Desai, senior executive director, transactions, Knight Frank India. So, while rental levels have recovered compared to pandemic lows, they are yet to conclusively break through pre-pandemic levels for key markets. In H1 2022, the average transacted rent in Mumbai was 110 per sq ft compared to 122.7 per sq ft in 2019.

“Given this, though India is uniquely placed compared to Asian peers given its relatively affordable rental rates, it is tough to see a repeat of the record year 2019," Desai said.

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