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Office space leasing declines to a six-year low in Jan-Jun due to 2nd covid wave

Information technology (IT) occupiers continue to lead demand, followed by banking, financial services and insurance (BFSI) segment. (File Photo: Mint)Premium
Information technology (IT) occupiers continue to lead demand, followed by banking, financial services and insurance (BFSI) segment. (File Photo: Mint)

  • Overall vacancy levels rose to 16.2% in the first half of 2021, as supply addition exceeded the pace of leasing activity. Prime locations with limited availabilities saw stable rents while a few micro-markets saw a sharp decline

Office space leasing activity in top cities in January-June 2021 fell by 38% to a six-year low of 10.9 million square feet (sq. ft) from 17.6 million sq. ft in the corresponding period of the previous year.

This comes as occupiers put expansion on hold and extended work-from-home options because of the severity of the second covid-19 wave, according to the ‘India Market Watch’ report by property advisory Savills India.

Absorption in the June quarter fell by 65% compared to the March quarter, which had started showing green shoots of recovery.

Bengaluru, the country’s most preferred tech-driven commercial office destination, led leasing momentum with 4.1 million sq. ft, about 37% of the overall absorption in the first six months of 2021, while Pune saw the lowest leasing volume and largest decline among the top six cities.

“There was an optimistic note to the start of 2021 with businesses picking up and normalcy in sight. However, the second wave of the pandemic and the subsequent lockdowns forced most organizations to reinstate their work-from-home policy, dampening the overall sentiment of the office market. However, I believe this is a temporary pause. With the strong vaccination drive across the country and India’s office market being fundamentally driven by a booming IT sector, I’m hopeful that we will be able to come back to the earlier growth track within the next two quarters," said Anurag Mathur, chief executive officer, Savills India.

In the first half (H1) of 2021, the overall vacancy levels increased to 16.2%, as supply addition was faster than leasing activity. Prime locations with limited availabilities saw stable rents, while a few micro-markets have seen sharp declines as landlords exhibited flexibility to get new clients.

Physical occupancy in offices has been significantly low since the outbreak of the pandemic last year, but was inching towards normalcy at the beginning of this year. However, the second wave has again not only created uncertainty in the demand for office space, but also dampened the keenness of large multinational occupiers to take up new space in India.

In the national capital region (NCR), Noida Extension and Golf Course Extension maintained their hold, but overall vacancy rose to 22% by June-end as leasing momentum could not keep pace with completions and several occupiers reviewed their real estate footprint.

Mumbai recorded 1.4 million sq. ft of gross absorption, a 39% dip from H1 2020, pushing rentals down by 5%. Vacancies rose to 20.4% as occupiers relocated to smaller office setups, surrendering space amid tough market conditions.

Despite the ongoing pandemic, information technology (IT) occupiers continue to lead the demand followed by the banking, financial services and insurance segment, the report said. The IT sector has increased absorption and holds 51% of the leasing share, but their combined share of approximately 63% is the same as in H1 2020.

Bengaluru, Hyderabad, Mumbai, and Pune witnessed an increase in project completions compared to the same period of the previous year, because of deferred supply getting completed, the report said. Bengaluru accounted for 36% of new supply, followed by Hyderabad and NCR at 28% and 22% respectively.

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