The work-from-home and wait and watch decision-making by office space occupiers is impacting the commercial segment with office leasing demand still lagging at 62 percent of its last-year same-quarter levels, said an analysis by Mumbai-based CRE Matrix.
Demand in the third quarter of calendar year 2020, however, increased by 4.5 percent as compared to the previous quarter, said the quarterly report titled India Office Q3 CY2020. The supply decreased by 8.6 percent and the all India office vacancy was 40 bps (basis points).
Recent leasing was driven by large occupiers consolidating or expanding as quality spaces became available. New spaces in Grade A/A plus complexes were signed at higher than markets rents in localities such as Whitefield in Bengaluru, Thane in MMR and Gachibowli in Hyderabad, it noted.
Bengaluru, Hyderabad and Pune contributed 72 percent to the overall office demand in Q3 2020. Interestingly, Grade A plus leasing demand is back in focus as occupiers showed preferences towards better quality (hygiene, security etc.) workplaces. Grade A plus spaces contributed 72 percent to the demand in these last two quarters as compared to an average of 61 percent in eight quarters starting Q2 CY’18 till Q1 CY’20, it said.
Supply, on the other hand, declined by 8.6 percent as compared to the previous quarter but was at 1.3 times its same quarter previous-year levels. Developers had planned to deliver 200 msf of office space over the next four years. However, the pandemic has stretched these plans to at least a 6-year time frame and we are likely to see the yearly average supply fall to 33-35 msf from the planned 45-50 msf, the report said.
While Hyderabad regained its top position in delivering maximum completion in Q3 2020, Bengaluru supply returned to normal levels as the city unlocked and labour started coming back. Hyderabad, Bengaluru and NCR contributed 82 percent to the overall supply in the quarter.
Vacancy levels across India are expected to rise over the next four quarters but thereafter should see a trend reversal.
On the pricing side, corrections have been witnessed across all cities and this is expected to continue till demand comes back to at least 75 percent of 2019 levels.
Softening of prices is likely to be amplified in Grade B and strata owned smaller size offices as compared to larger grade A+ offices owned by institutional investors and developers, the report said.
As platform deals continue to happen in the segment and India emerges a stronger alternative in the BPO/KPO space, a neutral outlook for the office sector for the next few quarters is expected.
Office demand in 2020 could close higher than 24–26 msf which would be much higher than the 2009 demand (19 msf) witnessed during the Global Financial Crisis (GFC), the analysis said.
In Bengaluru, the third quarter calendar year 2020 demand is up by 91 percent compared to last quarter and by 53 percent versus the calendar year 2019 levels. Key demand came from co-working (45%), commercial and professional services (19%). New completions tripled versus the second quarter of calendar year 2020 levels, almost at the last 9-quarter average supply levels.
South and South-East Bengaluru emerged as top macro-markets driving 49 percent of city’s office demand. Key demand drivers included co-working (45%), commercial and professional services (19%).
In Delhi-NCR, the third quarter calendar year 2020 demand was down by 32 percent versus the second quarter of the calendar year 2020, and down by 66 percent of its 9-quarter average. New completions up by 9 percent versus the previous quarter, and down by 37 percent versus the last nine-quarter average supply.
Suburban areas of Gurgaon and along the Noida Expressway together contributed 52 percent to overall leasing in NCR. Key demand drivers were commercial and professional services (24%) and BFSI (23%).
In MMR, demand was up by 3 percent versus the second quarter of the calendar year 2020 but was down by 64 percent versus the third quarter of the calendar year 2019. Completions declined by 65 percent versus the second quarter of the calendar year 2020 and were down by 35 percent versus the last nine quarter average supply.
Top-performing macro-markets included Powai and BKC core which contributed to about 47 percent to the demand. The key demand drivers were capital goods (32%) and BFSI (23%).
In Pune, the third quarter calendar year demand was higher by 32 percent versus the second quarter of the calendar year 2020 and was 18 percent lower than the third quarter of the calendar year 2019 levels. Supply was up by 26 percent versus the previous quarter but was down by 67 percent versus the last nine quarter.
Top-performing macro-markets included Kharadi (82% contribution) and Baner (11% contribution) and the key demand drivers included BFSI (87%) and IT/ITeS (10%).