Year-end Review: Office leasing hits second-highest on record in 2022 but faces headwinds next year 

For domestic tech outsourcing firms, negotiations in new contracts with their clients could impact the bottom line and headcount growth, limiting expansion activity, they said.

“Globally, there is caution about the spurt in the number of COVID-19 cases. While there may not be a severe impact as in 2020, many occupiers and investors may adopt a wait-and-watch approach and 2023 may see commercial leasing (demand) touching 37-40 mn sq ft due to global headwinds,” real estate experts said.

Commercial leasing surpasses pre-pandemic average

Despite falling short of 2019 figures, the net absorption for 2022 was the second-highest in the last 10 years and surpassed the five-year pre-pandemic average (2015-2019) by 3.1 percent, showcasing the strong resilience of the Indian office markets, an analysis by JLL showed.

On a quarter-on-quarter (Q-o-Q) basis, net absorption was down by 19 percent at 7.99 million sq ft, as early signs of sluggishness driven by global headwinds saw delayed decision-making and a cautious approach from occupiers impacting deal closures in the last quarter of the year.

Bengaluru led with a 23.7 percent share of net absorption for 2022 while Delhi NCR, Hyderabad and Chennai showed strong year-end momentum to power ahead of Mumbai and Bengaluru in Q4 net absorption, the report said.

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“The office market in India made a strong recovery in 2022 with the year emerging as the strongest in terms of office market performance post-COVID and second only to 2019 over the last decade. Even with the evolving hybrid work ecosystem, we have seen a sharp rise in office occupancy levels. This has resulted in a strong demand pick-up with occupiers approaching their real estate strategies with greater clarity and agility,” said Rahul Arora, Head Office Leasing Advisory India & MD, Karnataka and Kerala at JLL India.

Bengaluru retained its leadership position accounting for the highest net absorption for the calendar year 2022, with Hyderabad close behind in the second spot, he said.

Record-high completions and previous pre-commitments being honoured by most occupiers as return to work gained momentum across all industries pushed up office occupancies, supporting the net absorption numbers for 2022. The next year may witness a hybrid work environment depending on the severity of the COVID-19 wave, experts said.

However, space requirements have shown a slight softening with active requirements declining by about 15 percent as many real estate plans have gone on hold or shelved indefinitely given the evolving macroeconomic headwinds, especially in the fourth quarter.

“We are likely to see some delayed decision-making as businesses look at macroeconomic signals before committing capital for new offices. Driven by segments like flex, healthcare-life sciences, Global Capability Centres and manufacturing/industrial along with its leadership position in the global tech ecosystem, office demand is expected to be similar to 2022 with a marginal to slight upside,” said Samantak Das, Chief Economist and Head, JLL.

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Colliers India noted that the gross leasing of office space is likely to rise to 50.1 msf in 2022 across six major cities as demand from corporates has risen. Large enterprises are also actively taking office space in co-working centres as part of their strategy to save on capital expenditure.

“However, the shift has been more towards Grade A and enterprise/co-working solutions. The vacancy in Grade A offices in the top 7 cities stands at 17 percent while that for Grade B stands at over 22 percent. Similarly, the growth in enterprise solution take up was strong at 9 percent and along with co-working at almost 20 percent of the total demand - indicating that occupiers wanted to have a flexible strategy towards their growth plans,” said Gagan Randev, Executive Director, India Sotheby's International Realty.

Savills India also noted that office space absorption across India’s six major cities stood at 54.8 msf, recording a 48.5 percent increase in 2022. This was very close to the historic peak of 55.7 msf, recorded in 2019, falling short by less than one msf.

Bengaluru recorded its all-time peak at 17.3 msf and so did NCR and Chennai at 11.3 msf and 7.3 msf respectively. New supply rose by 45.1 percent at 53.4 msf when compared to 2021, it said.

But there are signs of caution. Despite the first half of 2022 recording an all-time-high H1 demand, the second half slowed, as if picking up signals of a global slowdown.

According to Arvind Nandan, Managing Director, Research and Consulting, Savills India, the year 2022 has been a story of two halves with H1 2022 outperforming H2 considerably. Apprehensions concerning global growth prospects have put real estate decision-making on hold, especially in the last quarter of the year.

Transaction activity by tech sluggish; flex continues to grow

Transaction activity by tech turned slightly sluggish and was visible in its reduced market share. Tech retained its top spot but saw its share slipping for the third quarter in a row to 25.3 percent while flexible spaces continued its golden run with an 18.8 percent share of gross leasing activity. Banking, Financial Services and Insurance (BFSI) showed good momentum backed by some large transactions witnessed in Mumbai during the quarter with its share of gross leasing at 14 percent.

In 2022, the tech sector led with a 27.6 percent share followed by flexible spaces with 18.5 percent and manufacturing/industrial with 13.9 percent shares, respectively, the JLL report said.

According to Savills India, while IT continues to drive the office market with 38.9 percent share of total leasing in 2022, with increased adoption of hybrid work, flexible workspaces contribution improved from 12.7 percent in 2021 to 14.1 percent in 2022. BFSI also maintained its pre-eminence at 12.2 percent share. Engineering and manufacturing, another important segment of demand, registered approximately 8.2 percent share of demand in 2022.

Supply, vacancy and rents

Of the 53.4 msf of new completions across the six major markets, Bengaluru and Hyderabad alone accounted for more than half of the supply addition.

While the all-India stock of Grade-A office space stood at over 700 msf, Hyderabad crossed the 100 msf mark for the first time in 2022 as it saw a supply infusion of 16.5 msf during the year, an outstanding year-on-year growth of 92 percent. The average vacancy level increased marginally from 18.3 percent in 2021 to 18.9 percent in 2022 on account of portfolio reallocations, Savills said in its analysis.

The rental value change across micro-markets varied within each city and even within micro markets. “Rents for green buildings were higher. Overall, rents remained stable as supply largely kept pace with demand,” experts said.

“Resurgent supply of around 60 msf expected by year-end was key in keeping rental escalation in check. However, core micromarkets such as BKC in Mumbai, ORR in Bengaluru, etc have witnessed rents bottoming out owing to a tight vacancy and a somewhat constrained supply of quality assets. Given a mild recession hitting Western economies, stable rents can be expected in the near-term (4-6 months), post which marginal rent escalations can be expected,” said Badal Yagnik, Managing Director, Cross Border Tenant Rep, APAC and Head, India Tenant Rep, Cushman and Wakefield.

Large deals dominate

The year 2022 also witnessed large deals.

According to real estate experts, commercial leasing for 1 lakh sq ft space dominated in the year 2022. Almost 38 percent deals were in this segment and were occupied by IT firms. Mid-sized deals for 25,000 sq ft to 59,000 accounted for about 36 percent.

“In markets like Mumbai, which is dotted with smaller trades, we have seen a resurgence of larger deals. Approximately 42 percent of the pan-India deals done thus far are of more than 50,000 sq ft,” said Quaiser Parvez, CEO, Nucleus Office Parks.

The outlook for 2023 is optimistic. In fact, any possible slowdown in the tech/start-up will be matched up with the increased demand from BFSI and consulting sectors. There is a visible shift from goods to services sector demand for commercial space. With the economy strengthening in India, bank balance sheets are getting stronger and better placed for growth in 2023, he said.

Rishi Raj, COO of Max Estates Ltd said his company witnessed a surge in occupancy and demand. “Both our operational assets Max House and Max Towers are 100 percent leased to established conglomerates across industries,” he said.

The company announced the expansion of its commercial real estate in Gurugram, cementing its presence in the National Capital Region. In addition, “we have won the bid for two land parcels of around 4 acres along the Noida-Greater Noida Expressway. This, combined with our assets under development – Max Square and Max House Phase 2, will help us increase our portfolio to around 4.5 msf,” he said.