Not everything is hunky-dory in the office space sector

Note that the information technology (IT) and IT-enabled services (ITES) industries have a large proportion of Grade A office occupants in major cities in India. Real estate consultancy firm CBRE said that in the June quarter, technology companies picked up office leasing with a share of around 31%. It was followed by engineering and manufacturing companies (16%) and banking and financial services firms (12%).

The commercial real estate sector was the worst hit by the pandemic. In recent quarters, important measurements such as occupancy levels and rentals have resumed, but the pace of recovery has been unimpressive compared to the hiring boom seen in the Indian IT sector.

In the residential sector, after the impact of the pandemic the supply crunch has been reduced, which has translated into rapid exhaustion of finished inventory. However, this is not the case with commercial space. An analyst at a domestic brokerage firm, requesting anonymity, said supplies were on.

“We think large tenants have moved out, but leasing activity is behind expectations. Office space has improved, but with high supply, the level of vacancies is yet to see a meaningful decline,” he said.

The latest comments by three real estate investment trust (REIT) managers listed on the Indian stock exchanges point to some portfolio exits. That said, new leases and renewals of lease agreements by tenants are expected to drive demand.

The Embassy Office Park REIT has scheduled completion of 3.1 million square feet (msf) in FY23, of which it is expected to renew 1.9 msf with a potential exit of 1.2 msf. For FY23, Embassy REIT has retained the leasing guidance of 5msf.

An August 25 report by ICICI Securities Ltd said that the Indian commercial real estate office market witnessed record leasing in CY19 with an annual net absorption of 42msf. The pandemic meant CY20 and CY21 were weak. However, with higher net absorption since 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 everything is scary for the region. A major concern of the US-led global slowdown is plaguing Indian IT companies. This may weigh on the spending decisions of IT customers and, in turn, affect the leasing plans of technology service providers. Moreover, with interest rates rising globally, the cost of borrowing for corporates is likely to rise, and this could also be a potential disadvantage to expansion plans.

“Large corporations in the IT and ITeS industry continue to search for office spaces. That said, the strong hiring by top Indian IT companies in recent quarters has yet to translate into a huge increase in absorption levels. Viral Desai, Senior Executive Director, Transactions, Knight Frank India said, “The overhang of a possible global slowdown is at play here. Therefore, while rental levels have decreased compared to the pandemic, they are still at pre-pandemic levels for the major markets. In the first half of 2022, the average transaction fare in Mumbai was Compared to 110 per sq. ft. 122.7 per sq ft in 2019.

“Given this, though India ranks uniquely compared to its Asian peers in view of relatively affordable rental rates, it is difficult to repeat the record year 2019,” Desai said.

first article