India office market shows resilience, Q3 net absorption at 6-quarter high

The combination of qualified talent pool and cost advantage has continued to help Indian commercial real estate sustain the growth trend with resilience despite the global headwinds. Net absorption of office spaces across key property markets in the country during the September quarter recorded its strongest performance in 18 months.

Top seven office property markets of India jumped to a six-quarter high of 10.37 million sq ft, up over 30% from the previous quarter. Gross leasing activity in these markets rose to 16.03 million sq ft, surpassing the average quarterly leasing witnessed in the historic pre-pandemic year of 2019, showed data from JLL India.

The manufacturing sector led the gross leasing activity during the quarter, while technology firms remained slightly restrained. However, the demand is expected to improve as key information technology companies including Tata Consultancy Services have started to insist on work from office.

“India’s office market performance in the September quarter is testament to the strong fundamentals of demand and the complete absence of any lasting effects of the global headwinds, except delayed decision-making,” said Rahul Arora, Head Office Leasing Advisory, JLL India.

According to him, the strong leasing momentum is driven by India’s tech ecosystem which is seeing strong offshoring and research & development work across multiple sectors. Global capability centers accounted for a 44% occupier share during this quarter in terms of operations. This multi-year trend is expected to keep the Indian office markets among the most growth-oriented globally.

The net absorption of office spaces during the quarter was higher in the top seven cities except Chennai and Kolkata. Hyderabad took the top spot with 26.1% share, followed by Bengaluru 22.9% and Delhi-NCR 16.4%.

On a year-to-date comparison, net absorption in 2023 is 13.9% lower from a year ago as firms deferred growth plans and looked at portfolio optimisation given the global sluggishness, though they remain bullish on long-term plans for their real estate footprint in India.

“While consolidation still dominates the office net absorption, prior pre-commitments were honoured and new space acquisitions remained healthy during the quarter. With deal closures on track, we are likely to see the net absorption numbers meet the forecasts of 36-39 million sq ft in 2023,” Samantak Das, Chief Economist and Head of Research and REIS, India, JLL.

The quarter recorded new completions of 14.44 million sq ft, a 37.7% sequential increase. Bengaluru, Hyderabad, and Chennai led the new completions with a combined share of nearly 72%.

A significant part of the pre-commitments during the quarter came from new completions in Pune--46% of the supply was pre-committed, followed by Mumbai at 42%.

With new completions surpassing net absorption, the Pan-India office vacancy has increased marginally by 20 basis points to 16.8%. JLL India estimates that while net absorption is expected to remain strong, office vacancy is likely to remain sticky within the 16-18% range. Moreover, quality and superior-grade projects will continue to find favour from occupiers and hence will see much better occupancy levels.

The impact of favourable manufacturing policies and India’s engineering talent continues to gather momentum as it rose to become the biggest contributor to the quarterly leasing activity with an 18.6% share.

Flexible workspaces continued to occupy the second spot, accounting for a greater share at 18.4%. The sluggishness in technology on account of the third-party IT firms evaluating their current portfolio continued with the sector’s contribution to gross leasing moving down to the fourth spot for the first time in the past decade.

With a sustained demand for flexible and managed enterprise services, nearly 39,600 seats were leased by flex space occupiers during the quarter. On a year-to-date basis, flex office spaces are already at 80% of the total seats leased in 2022. Bengaluru and Delhi NCR accounted for more than half of the flex space seats leased by occupiers during the quarter.