The year 2020 witnessed commercial office gross absorption of about 34 million square feet across the top six cities in India, a fall of about 41 percent from 2019, which saw demand at an all-time high. However, gross absorption during the second half of the year rose 25 percent over the first half of 2020, a report by Colliers Research has said.
The gross absorption during the year that was marked by the pandemic was at a six-year low.
Demand picked up during the second half of the year as occupiers gained confidence to finalize deals that were stalled during the year and start planning for returning to ‘business as normal scenario’.
Bengaluru accounted for 33 percent of the gross absorption at about 11.2 million square feet. This was followed by Hyderabad and Delhi NCR with a share of 18 percent and 17 percent respectively.
On the supply front, 2020 saw about 38.1 million sq. feet of supply infusion, a decline of only 2 percent from 2019, despite a nation-wide lockdown in Q2 2020 hampering construction schedules, the report said.
Southern cities remain resilient
The southern cities accounted for 63 percent of the total gross absorption during the year. Bengaluru not only led leasing activity in the country, but also witnessed the least disruption to demand in 2020 from the pandemic. The city witnessed gross absorption of about 11.2 million sq. feet, a drop of 25 percent from 2019 levels.
Chennai and Hyderabad witnessed lower absorption of 30 percent and 37 percent respectively, from 2019 levels. Leasing activity in Bengaluru and Hyderabad was led by the completion of buildings that had prior pre-commitments, the report said.
"While the pandemic did lead to a temporary challenge, Southern cities weathered the storm and proved to be most resilient. Bengaluru, not only led the office absorption in India but due to pre-commitments and enquiries from Q3, 2020 onwards is expected to bounce back in 2021", said Arpit Mehrotra, Managing Director, Office Services (South India) at Colliers India.
During the year, cities such as Bengaluru and Hyderabad continued to witness stable rentals and did not see a drop in quoted rentals by developers led by sustained queries for space in the second half of the year.
Bengaluru and Hyderabad have been witnessing pre-commitments and enquiries from Q3 2020, signaling a revival in demand for office space from occupiers.
“The commercial office market has started improving since Q3 2020, and we expect the market to recover post June 2021. We believe that demand for office space will be run by technology companies, especially for their global in-house centers,"said Siddhart Goel, Senior Director & Head of Research, Colliers India.
"Suburban and peripheral office locations will continue to garner traction, and occupiers will look to adopt a hub and spoke model for ease of employees. While rentals have dropped in cities like Delhi-NCR and Mumbai, cities like Bengaluru, Hyderabad and Pune continue to be resilient,” he said.
Western cities witness sharpest drop
Mumbai and Pune saw their demand more than halve this year as they recorded a drop of 62 percent and 60 percent respectively in their gross absorption this year. This was because the state of Maharashtra saw one of the longest and toughest lockdowns owing to the pandemic, which affected both demand and supply of commercial offices.
As employees have operated from homes most of this year, their employers are using this period to assess their office needs and strategize for the future. The supply too has also been relatively low and given that vacancy rates in Mumbai (13.5 percent) and Pune (9.5 percent) are low, there was not much vacant space to transact this year.
“The commercial office market in Mumbai is showing resilience, owners of commercial real estate have lowered their return expectations, which is a good sign. Investors should keep their return expectations reasonable for sustainable growth. Recovery to the pre-COVID-19 levels will depend on stable government policies, at both state and central level and incentivising corporates to grow and hire,” said Sangram Tanwar, Managing Director, Office Services (Mumbai) at Colliers India.
“The impact of the current adversities on the commercial office sector doesn’t seem very significant when compared with the decadal average of absorption i.e., 4.5 million sq. feet per year. The leasing activities in 2021 is expected to be majorly driven by sectors like information technology followed by healthcare and E-commerce,” said Animesh Tripathi, Senior Director, Office Services (Pune) at Colliers India.
Leasing activity in 2021 expected to pick up further by 25-30 percent
The Colliers Research said that leasing activity this year is expected to pick up further by 25-30 percent to around 42-45 million sq. feet. Bengaluru, Hyderabad and NCR are going to continue to drive leasing amongst the top six Indian cities.
Tech companies involved in fintech, healthcare, e-commerce, and entertainment (OTP and gaming), amongst others may be significant demand drivers even as IT-BPO companies, followed by BFSI companies will remain the main occupiers as has been the trend over the last decade, said Siddhart Goel, Senior Director & Head of Research, Colliers India.
According to Bhupindra Singh, Managing Director, Regional Tenant Representation (India) & Office Services (North India) at Colliers International, “Given the impact on their business, occupiers today are averse to making heavy capex investments in their real estate operations. Hence, we have been seeing most of our clients, Indian as well as MNCs, looking at options for leasing managed offices that provide them with the best layouts, fit outs and services to support their business activities.”