Gross office leasing activity across seven markets down by 8.7% q-o-q: JLL analysis

India's net absorption in its top seven cities decreased to a six-quarter low of 7.63 million square feet due to reduced expansion activity, delayed space plans and a hybrid workplace strategy that is still evolving. Companies were consolidating and relocating to save on real estate costs, while there were fewer pre-commitments in new completions during the quarter. This reflects the challenges faced by the corporate world amid global headwinds and an uncertain business environment, the analysis said.

Although Q1 2023 has seen a slight decrease in leasing activity, it is too early to conclude that the office market is sluggish. Q1 2023 had the highest leasing activity compared to the same periods in 2021 and 2022. However, space requirements have decreased by 15-20 percent due to delayed decision-making and global economic headwinds, which may continue to impact space decisions throughout the year, the analysis noted.

The growth of offshoring driven by GCCs or global capability centres in various segments is also likely to aid upcoming office market activity. The report expects office demand to be close to 2022 levels in the range of 36-40 million sq ft, though better clarity will emerge by next quarter. Around 53-58 million sq ft of new supply is expected to come online in the next 12 months, with higher pre-commitment rates of 22-25 percent, in institutionally owned assets (against 14-17 percent in total), indicating emphasis on healthy workspaces and ESG considerations, it said.

“Despite a slight dip in overall leasing activity during Q1 2023, it is premature to conclude that office markets are experiencing a sluggish period. In fact, this quarter saw the highest leasing activity compared to the same periods in 2021 and 2022. The growth story driven by GCCs in various sectors such as BFSI, new tech, engineering R&D, along with segments like flex (flexible space), healthcare-life sciences and manufacturing/industrial occupiers, is expected to propel office markets' activity,” said Rahul Arora, head, office leasing advisory, India, and MD, Karnataka and Kerala, at JLL India.

“As occupiers remain cautious about capex-spend, they are strategically incorporating flex spaces in their real estate portfolios. Flex operators' footprint which is now spread over 50 million sq ft across seven major cities, and escalating demand for managed solutions from occupiers reflect the surge of this occupier segment in the industry,” added Arora.

Flex remains strong, contributing 17.8 percent to gross leasing. Bengaluru, Delhi-NCR and Pune are the top three cities for leasing activity.

“Although there has been a slowdown in the tech industry, we anticipate that the demand for office space will remain stable, reaching similar levels as in 2022, with an estimated range of 36-40 million square feet. However, we will have a clearer picture of the direction of office demand after another quarter,” said Samantak Das, chief economist and head of research and REIS or real estate information standards, India, JLL.

“With return to work gaining momentum, real estate planning will focus on talent mobility, healthy work environments and the employee value proposition. Flexibility will be a key component of real estate portfolio management. We must also monitor the recent surge in COVID cases, as any disruptions to return to work may delay real estate decision-making,” added Das.

Net absorption at a six-quarter low

Delhi-NCR remained the top city in terms of net absorption for the second quarter in a row, followed closely by Bengaluru. Pune saw a significant improvement in net absorption, jumping to third place with a 16.8 percent share, supported by healthy pre-commitments. There was also a big increase in Kolkata's quarterly net absorption, which reached a five-quarter high.

Net absorption is calculated as the new floor space occupied less floor space vacated. Floor space that is pre-committed is not considered to be absorbed until it is physically occupied.

Quarterly supply at 9.96 mn sq ft, down 32.8 percent q-o-q

In Q1 2023, 9.96 million sq ft of new completions were recorded, which is a decrease of 32.8 percent compared to the previous quarter. Bengaluru had the highest new completions with 47.7 percent, followed by Pune and Delhi-NCR with 18.4 percent and 18.1 percent. These three cities made up 84 percent of the new completions. Only 21 percent of the new supply had already been committed, which reflects the current uncertain and bearish business environment.

Chennai had a pre-commitment rate of 100 percent, while Pune had 53 percent. Hyderabad and Mumbai had pre-commitment rates of 27 percent and 24 percent, respectively, and Delhi-NCR had a pre-commitment rate of only 11 percent, the analysis said.

Pan-India vacancy has also risen marginally to 16.7 percent, up 10 basis points on-quarter, with new completions continuing to outpace net absorption. Vacancy is expected to remain sticky within the 16-17 percent range. The future supply pipeline remains strong and while leasing momentum is showing a slight deceleration, a more prominent trend is yet to become visible. Moderate to strong pre-commitments in upcoming projects and expectations of leasing activity picking up steam by H2 2023 are expected to support the net absorption projection and keep vacancy within the range, the analysis added.