Cumulative commercial transactions in Bengaluru dipped 14.3 percent in CY2023 to 12.5 million square feet (msf), according to a report by Knight Frank India. The decline in transactions, according to experts, was due to inflationary US markets and a slowdown in the tech sector, one of the major office occupiers in Bengaluru.
Global Capability Centres (GCC), flex spaces and India-facing occupiers supported the office leasing momentum in Bengaluru while there was moderation from tech occupiers, the report, ‘India Real Estate: Residential and Office (July - December 2023)’ stated. It was released on January 3.
"Last year, office space absorption was exceptionally high at about 15 msf, and soon with the slowdown in the IT sector, we saw transactions coming down in Bengaluru even though it continues to remain the second-most-sought-after city across India," Vivek Rathi, Director of Research at Knight Frank India, told Moneycontrol.
Despite not having had its best year in terms of transaction volumes, rent growth has been strong in Bengaluru on account of the limited supply of Grade A office space. The average transacted rentals in Bengaluru grew by 6.6 percent YoY to Rs 86.4 per sq ft per month in 2023.
On the other hand, the leading eight Indian markets witnessed a total office transaction of 59.6 msf in 2023 overall, registering growth of 15 percent YoY.
The eight markets are Mumbai, NCR, Bengaluru, Pune, Chennai, Ahmedabad, Kolkata and Hyderabad.
Mumbai recorded 7.4 msf of office space transactions in 2023, up 16 percent with a supply of 3.1 msf, 52 percent more than the previous year.
The National Capital Region (NCR) saw 10.1 msf of office transactions in 2023, up 14 percent with a supply of 7 msf, 11 percent less than in 2022.
While the overall vacancy across the top eight cities dropped to 16.1 percent in 2023 from 17 percent in the previous year, Bengaluru saw a 1 percent increase in vacancy levels. "With a lower office transaction number and large supply, the vacancy dropped (overall). We expect the office segment to bounce back in Bengaluru by the H2 of CY2024, as recessionary markets like the US gain back momentum," Rathi added.
Despite the slowdown in office space leasing by third-party IT services companies, which accounted for 15 percent of total transactions in Bengaluru in 2023 compared to 27 percent in 2022, the leasing has been influenced positively by Global Capability Centres (GCC), flex, and India facing occupiers. GCC players primarily focused on manufacturing, consulting business and BFSI. Qualcomm, Deloitte, MUFG etc., were some of the big-ticket occupiers in 2023.
GCCs dominate commercial transactions in 2023
Global Capability Centres recorded a surge of 58 percent in transaction volumes from 13.2 msf in 2022 to 20.8 msf in 2023. Cumulatively, their share has grown from 25 percent in 2022 to 35 percent in 2023.
Chennai witnessed the highest GCC-focused transactions at 6 msf, followed by Hyderabad at 4.1 msf.
Though the GCC segment recorded a significant markup in its share, the India Facing Business segment continued to anchor the office market with 21.9 msf of office market transactions in 2023. Mumbai led annual India Facing Business office transactions at 5.8 msf, closely followed by NCR at 5.5 msf.
Flex office space share drops
The need for flexibility of tenure is not as intensely felt compared to 2022 when flex spaces accounted for 19 percent of the total transacted volumes, against 17 percent in 2023.
"This phenomenon is more visible in H2 2023, where flex space operators took up just 11 percent of the total transacted area compared to 22 percent in H2 2022. However, it must be noted that H2 2023 is the first half-yearly period in which we have observed a significant drop in the share of flex spaces," the report added.
However, despite a nationwide drop in the share of flex spaces, there was an increase of 1 percent in Bengaluru in 2023. Leasing activity by flex occupiers reached 3.8 msf, comprising 30.3 percent of the overall transaction volume, reflecting a 23 percent increase over 2022.
"With third-party IT services slowing down, GCC and India Facing Businesses continued to operate in flexible models, thus showing an increase in the city's share of flex spaces," Rathi said.
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