Commercial realty in a bind; absorption rates drop 37% YoY

The mood in the commercial real estate sector is downright doleful. Companies are going slow on expansion and industry reports suggest office absorption rates have declined by 37 percent this year from 2012 levels. CNBC-TV18’s Priyanka Ghosh reports.

Office complexes were once very much in demand, when the economy was booming and corporate India was stepping on the gas. But now, developers of commercial real estate are a worried lot.
Estimates by Cushman and Wakefield say that between January and March 2013, office absorption of 3.6 million square feet across India has dropped by 37 percent against a year-ago. Also Read: Mutual funds or Real estate, which is better?
Bangalore has been the worst hit, with an 80 percent decline; Kolkata has seen a 40 percent drop and Mumbai has seen a 38 percent drop.
Real estate services companies like DTZ point out that this problem will not go away anytime soon because even though supplies are going down, they still tower over demand.
"If you look at supply figures this quarter, it is a lot less than what it has been QoQ in India. So supply is slowing down because developers are slowing down construction seeing the state of the market. But at the end of the day, you cannot stop construction if you have invested significantly. So after a point, there is no choice but to complete buildings. But I think supply has slowed down. This quarter we have got 6-7 million square feet of supply and for the whole year, we anticipate about 35 msf supply against a demand of 30 million square feet," Anshul Jain, CEO, DTZ India told CNBC-TV18.
Even if demand picks up, it will take some time for this imbalance to even out. Experts say they see vacancy rates improving to 24 percent in the next couple of years, against the current average of 19 percent.
Some experts are not overly pessimistic. They say that though absorption rates have been poor this quarter, there is a lag of 6-9 months between decision making and the offtake in space. So these figures are more a reflection of the sentiment prevalent 6 months ago. Also, they point out that rentals across markets are largely stable, with Bangalore and Pune seeing an upward bias and expect the commercial sector to register a 10 percent rise in absorption this year.