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Upcoming office supply likely to keep vacancies high, rents under pressure: Edelweiss Research

Demand in 9MCY21 is at 11.5msf which is down 14 percent YoY, indicating the pandemic’s adverse impact, it said

Office rentals remained stable across the major markets in India in Q2 2021.

Office rentals remained stable across the major markets in India in Q2 2021.

Progress on vaccination rollout and resumption of employees’ return to offices bode well for office demand but large upcoming supply is likely to keep vacancies high and rents under pressure in the near term, says an analysis by Edelweiss Research titled Hot Property.

It states that while an improvement in office leasing is expected, CY21 leasing is unlikely to match the around 20msf absorption witnessed in CY20 considering that 9MCY21 demand is just 11.5msf (down 14 percent YoY).

What is concerning is the fact that supply deferment has lost steam; in fact, adjusting for completions in Q3CY21, upcoming supply by CY23 actually rose QoQ during the quarter. This can skew the demand-supply equation going ahead. With 100msf-plus supply likely to come online by CY23, a substantial pick-up in demand is needed, that too quickly, it said.

The third quarter of the calendar year 2021 witnessed demand rising 48 percent YoY and 21 percent QoQ to 4.3msf. Leasing activity picked up with vaccination gaining pace and the economy opening up. However, 9MCY21 demand at 11.5msf is down 14 percent YoY, indicating the pandemic’s adverse impact, it said.

Office supply at 6.9msf during Q3CY21 declined 9 percent YoY and 3 percent QoQ with developers holding back release of new supply and focussing on leasing of existing projects. Certain projects initially slated for completion during the quarter have been deferred in anticipation of higher demand from tenants for completed projects in Q4CY21, it noted.


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Rental performance was a mixed bag—-while Bengaluru, Pune, Hyderabad, Chennai and Kolkata witnessed flat rents sequentially, others such as MMR and NCR and Chennai suffered a dip in rents.

As vacancies rose, pressure on rents persisted with landlords being much more amenable to concessions such as lower CAM charges, higher rent-free periods, lower rental escalation and fully furnished spaces. JLL believes absorption going ahead in CY21 will decrease YoY, but expects vacancies to decline to sub-15 percent levels.

Deferment of completions to Q4FY21 led to supply during the quarter dipping 9 percent YoY and 3 percent QoQ. NCR, MMR and Hyderabad accounted for bulk of the supply during the quarter. Except NCR, Chennai and Pune, supply declined QoQ in other cities.

Bengaluru, Hyderabad and the NCR were the largest contributors to demand during the quarter with around 84 percent share. Except the MMR, Bengaluru and Pune, demand improved QoQ in all cities. Average quarterly absorption during 9MCY21 was barely half of the average quarterly demand during CY15–19, indicating the impact of the pandemic on leasing

Pre-commitments lent support to absorption during Q3CY21

In Hyderabad, the entire supply of 1.2msf during the quarter was pre-committed (to Google). Other cities also had healthy levels of pre-leasing. While supply increased QoQ in the NCR, Chennai and Pune during the quarter, completions in other cities declined or were flat. Absorption decreased sequentially in the MMR, Bengaluru and Pune, but increased in other cities.

With supply eclipsing demand, vacancy rates rose in the MMR, the NCR, Chennai and Pune, but declined in other cities. As far as rentals are concerned, most cities clocked either flat rents or a decline QoQ.

NCR along with tech-dominated cities of Bengaluru and Hyderabad drove office space demand in Q3CY21. As far as supply is concerned, Hyderabad, the NCR and the MMR made up around 77 percent of overall supply in Q3CY21. IT/ITeS segment retains dominant share of demand. The IT/ITeS segment (which is linked to global economy), on average, contributed around 42 percent to office space demand in India over CY16–20 as well as H1CY21. The segment continued to contribute handsomely to leasing in Q3CY21.

Institutional investment in real estate down 47 percent QoQ

With the slowdown in office demand over the past year, the quantum of investments flowing in the office space has also declined. The office segment saw a sharp decline in investments to $100 million in Q3CY21 from $405 million in the year-ago period. However, 9MCY21 investments in office space at $1.2 billion are up 22 percent YoY, highlighting the enduring appeal of the space for investors, the analysis showed.

Over the medium term, attractive REIT opportunities in India are likely to lead to higher institutional investments in the office space. India currently has 284msf of REIT-able space with a value of $36 billion.

As for the outlook, the pandemic has led to concerns about future demand trajectory, compelling developers to scale down expansion plans. Prior to Covid-19, the strong absorption trajectory had ignited hope that the upcoming supply could be absorbed without much challenge. However, the pandemic has led to deferment of leasing decisions.

Demand for office space is expected to pick up in a meaningful way only in CY22. Cities such as Hyderabad and Bengaluru will be relatively better placed than others due to healthy pre-commitments in supply expected to come on stream in Q4CY21. However, others like Pune and Kolkata have limited pre-commitments and are likely to witness an increase in vacancies, the analysis said.
Moneycontrol News
first published: Oct 19, 2021 05:00 pm

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