Commercial real estate: The curious case of vacant office spaces

Net office absorption stood at 5.85 MSF in Q3 2021, growth of 48% sequentially and a 8% Y-o-Y growth. New completions stood at 10.89 MSF, a drop of 7% against Q2 2021 and a 19% Y-o-Y increase. (Representative image)

Vacancy levels in commercial real estate (CRE) space have surpassed the 16% mark with net absorptions failing to keep pace with completions. This is the second time since 2017 that vacancy

levels have breached the 13-14%-mark. According to JLL India, vacancy levels at the end of the July-September period this calendar year rose to 16.4% — the seventh straight quarter of rise. This is the highest level in last 11 quarters. During Q1 2019, vacancy levels stood at 13.3% from where it declined to 12.8% in Q1 2021, then Covid struck and levels have been rising ever since.

“New completions continued its streak of previous two quarters (Q1 and Q2) with 10.8 million sq ft  (MSF) of supply influx during Q3 2021.

“However, net absorption could not keep pace with new completions as occupiers are still cautiously evaluating their real estate portfolios and optimising cost to ensure business continuity thereby increasing the vacancy levels by 60 bps,” JLL India said.

With limited pre-commitments in the newly added supply, especially in Bengaluru, Mumbai, Hyderabad and Delhi, overall vacancy levels increased. Despite rise in overall vacancy levels, markets of Chennai and Pune continued to hover in single digits. This augurs well for a strong rebound in these markets as business conditions will gradually improve in the coming quarters, it added.

Net office absorption stood at 5.85 MSF in Q3 2021, growth of 48% sequentially and a 8% Y-o-Y growth. New completions stood at 10.89 MSF, a drop of 7% against Q2 2021 and a 19% Y-o-Y increase.

JLL India chief economist Samantak Das told FE that in Q2 2020, Covid put brakes on the booming office market, which was most impacted as lockdown measures disrupted the way people work. Office occupiers continue to review their real estate portfolios and adopted consolidation and optimisation strategies through the year.

The relatively subdued net absorption levels of 25.6 MSF could not keep pace with new completions of 36.3 MSF in 2020. Resultantly, vacancy increased continuously over the last three quarters of 2020.

While the unlocking of economy and subdued Covid-19 cases across the country, backed by an aggressive vaccination drive, have aided in recovery of office market and led to increased leasing activity during the quarter across the top seven markets, net absorption is yet to keep pace with new completions, Das said.

For the nine months ended September 2021, net absorption stood at about 15 MSF while new completions have almost touched the levels of 2020. With limited pre-commitments in the newly added supply especially in markets of Bengaluru, Mumbai, Hyderabad and Delhi NCR overall vacancy levels increased to 16.4% at the end Q3 2021.

“Due to a steady pipeline of assets coming online, the demand-supply gap has momentarily widened. Nevertheless, with demand expected to pick up in the coming quarters, vacancy is likely to return to sub-15% levels by the end of 2022,” Das said.