Commercial real estate is clocking sustained growth
With rising lease rentals, high absorption levels and global occupier interest, India’s commercial office market continues to remain a bright spot for the real estate sector in the country. The past year was a landmark one for the segment, with absorption of more than 43 million sq. ft of investment grade office space recorded in the country; an annual growth of 9% year-on-year (y-o-y).
Bengaluru and Delhi NCR dominated office leasing activity, followed by Hyderabad and Mumbai. Hyderabad, in particular, witnessed a steep rise in occupier demand, with absorption more than doubling from 2015 to cross 6 million sq. ft in 2016.
The largest occupier of office space during the year continued to be the IT/ITeS sector, along with demand from banking, financial services and insurance (BFSI) and the engineering and manufacturing sectors. Space take- up comprised of both expansion and new leases, driven by both domestic and US-based occupiers, largely for their back-office operations.
While demand witnessed a rise, supply fell by about 10% in 2016, dropping to 35 million sq. ft from approximately 39 million sq. ft in 2015. Rental trends displayed aclear divergence in 2016, with rental growth tapering in core micro-markets of cities such as Delhi NCR and Mumbai, while beginning to rise in decentralised peripheral micro-markets of cities such as Bengaluru, Hyderabad, Chennai and Pune.
The first few months of 2017 are showing sustained activity across the segment in the top cities in India with close to 8 million sq. ft of office space take- up recorded between January and March. This momentum will be backed by companies looking to expand or consolidate operations. However, we expect leasing activity to be marginally impacted in the medium to longterm, with space take-up likely to touch about 40 million sq. ft.
During 2017, Delhi NCR, Mumbai and Ben ga lu ru will continue their dominance in the overall space take-up. However, with lower costs and abundant availability of talent, we do expect the share of smaller cities like Hyderabad, Chennai and Pune to become preferred locations by corporates to set up operations or expand. While the IT/ITeS (mainly led by ITeS), BF SI and engineering and manufacturing sectors will remain the main demand drivers, other sectors whichwill remainactive are consulting and research.
From a location perspective, while the demand for quality space in core locations will remainstrong, dwindling availability and rising cost-sensitivity of tenants is likely to result in space take-up shifting to decentralised locations; thereby boosting take-up of primary space. Occupiers are likely to follow this trend of “flight to value”, while also using space utilization strategies such as workplace optimization and co-working spaces.
With various corporates looking to consolidate/expand/relocate to peripheral or suburban markets, we expect demand for large sized spaces to see an uptick in 2017. At the same time, the demand for small-medium sized spaces will continue to remain strong. Additionally, cities like Mumbai and Bengaluru might witness increased instances of purchase of space for enduse, along with a rising demand for space in properties for selfuse (Built to Suit, or BTS).
In the recent past, we have witnessed the trend of automation gaining traction in the country. Companies are beginning to look at options to replace lowlevel and certain mid-level jobs with technological innovations. Processes such as the Internet of Things (IoT), increased usage of machines, robotics and even data analytics are likely to impact jobs in the “repetitive” or “low-skilled” categories. As an alternative, corporates (IT/ITeS in particular) may see an increasing demand for employees with higher skills, specifically those who are able to work in an environment requiring minimum human interface.
During the year, supply across the seven cities is expected to rise marginally to approximately 38 million sq. ft. Mumbai and Delhi NCR are expected to witness the completion of pent up supply, resulting in the overall abatement of completion delays across cities. During the year, the supply pipeline will be dominated by Hyderabad, followed by cities such as Bangalore and Mumbai. Most of the upcoming supply will be in the peripheral/suburban locations, which is likely to attract enhanced enquiries and strong pre-commitment activity in the coming months.
Astheoffice marketcontinues to develop, we expect occupiers, to keep a strong check on space utilisation ratios and innovations in workplace strategies, while implementing their expansion plans. Additionally, we expect developer focus on BTS developments to continue in cities such as Bengaluru and Chennai. Pre-commitments in projects which are nearing completion are expected to continue in the coming months, particularly in the cities of Bengaluru, Hyderabad and Mumbai. As the market continues to mature, rising saturation, inadequate infrastructure and high rentals in cities such as Bengaluru are likely to be critical factors guiding occupier strategies in 2017.
While demand witnessed a rise, supply fell by about 10% in 2016, dropping to 35 million sq. ft from 39 million sq. ft in 2015