India’s office market across seven major cities remained resilient in the first quarter of 2020, despite a challenging global economic climate. Approximately 52-mn sq ft of Grade A office space was completed and more than 46 mn sq ft absorbed in 2019 according to the ‘India Office Market Update Q1-2020’ released by JLL, India’s largest real estate consultancy firm today.
“Office assets offered high growth and stable returns. Investors, domestic and foreign alike chased investment-ready commercial assets and development opportunities in top cities,” adds the report. However, the impact of the COVID-19 pandemic became more apparent in March as most businesses defer their real estate decisions. Net absorption of office spaces in Q1 2020 witnessed a decline of 30% from the peak observed in Q1 2019. IT- ITeS (56%), as well as co-working (13%) occupiers, drove leasing activity during the quarter
Furthermore, construction activity and the process of obtaining requisite approvals from the government also slowed down in the beginning of March, in line with growing concerns about the impact of COVID-19. “New completions were recorded at 8.6 mn sq ft in the first quarter of 2020, a 40% drop as compared to the same period last year,” adds the report.
“The evolving COVID-19 crisis is prompting corporates to re-evaluate their commercial real estate strategies, with a focus on enhancing resilience measures. There will be a greater emphasis on cost management, employee wellbeing and sustainability, and the adoption of flexible working practices as resilience practices ramp up,” said Ramesh Nair, CEO & Country Head, JLL. “Over the next few months, leasing is expected to be mainly driven by renewals and consolidation activity. With fresh take up of spaces likely to be limited over the next couple of months, landlords might have to sit on locked in capital (completed buildings) for a relatively longer time period,” he added
Net absorption more challenging
The three larger markets of Bengaluru, Mumbai and Delhi NCR accounted for nearly 75% of the net absorption in Q1 2020, despite the overall decline in the overall market. Net absorption in Mumbai and Chennai more than doubled in Q1 2020 as compared to Q1 2019, led by strong leasing activity in the first two months by IT/ITeS occupiers.
However, the global health crisis arrested the growth of the Hyderabad market with limited relevant supply coming into the market, declining by 78% in net absorption in the first quarter of 2020 year-on-year. Resultantly, Hyderabad’s contribution to overall net absorption fell from 29% in Q1 2019 to 11% in Q1 2020.
“The strong leasing momentum of 2019 continued in the first two months of 2020 before the pandemic impacted the Indian market in March. Several leasing deals in the final stages of negotiation were deferred as the office market witnessed a net absorption decline of 30% y-o-y. New completions also saw a fall of 40% y-o-y during Q1 2020. Several office assets in the final stages of completion were stuck owing to delays in obtaining requisite approvals from the government authorities,” said Samantak Das, Executive Director and Head of Research, REIS, JLL.
Strong pre-commitment buoyed office absorption during the quarter
Office absorption in Q1 2020 was backed by strong pre-commitment levels in new completions during the quarter. The quarter witnessed a net absorption of 8.6 mn sq ft of Grade A office space, out of which pre-commitments accounted for 4.9 mn sq ft.
All new supply in Chennai and 83% of new supply in Mumbai during the quarter was already pre-committed, correlating with broader office leasing trends in both markets. The single-digit vacancy markets of Bengaluru and Hyderabad also saw strong pre-commitment levels (>50%) in new completions during the quarter.
IT-ITeS occupiers drove the pre-commitment activity across most of the major office markets in India. These occupiers require larger floor plates and pre-commitment becomes a necessity in markets with very limited availability of Grade A office spaces. New completions take a hit with delay in obtaining approvals
New completions were recorded at 8.6 mn sq ft in Q1 2020, a fall of 40% Y-o-Y from levels observed in Q1 2019 and representing the second largest dip witnessed in new completions in the last five years. Post demonetisation, new completions dropped to less than 20% of that seen in Q1 2016.
In sync with net absorption, Bengaluru accounted for a major chunk of the new completions in Q1 2020. The Delhi NCR market, which gained steam in Q4 2019, witnessed a fall of 44% in new completions y-o-y. Hyderabad’s rise in the office market was also paused with new completions in Q1 2020 decreasing by 68% y-o-y. Even though Mumbai witnessed new completions of 0.84 mn sq ft in Q1 2020, supply of commercial Grade A office spaces in primary submarkets remained constrained.
Vacancy levels remain range bound across markets
Vacancy levels came down to 12.8% in Q1 2020 from 13.3% in Q1 2019 (Table III). Cities like Bengaluru (5.6%), Hyderabad (7.7%), Chennai (8.0%) and Pune (5.5%) continued to hover at single-digit vacancies. Bigger markets such as Mumbai and Delhi NCR recorded vacancy levels of 12.7% and 27.2% respectively.
While the vacancy levels at the city level is high due to the higher availability of office space in the peripheral submarkets, vacancy was recorded in the lower single digits in the prime business submarkets (for instance, BKC in Mumbai and Cyber city in Delhi NCR hovers at <5%).
Over the next few months, leasing is expected to be mainly driven by renewals and consolidation activity. With fresh take up of spaces likely to be limited, landlords might have to sit on locked in capital (completed buildings) for a relatively longer time period. Occupiers have also begun renegotiating their lease contracts for lower rents, an extension of rent-free period as well as waiver of lock-in periods. Short-term liquidity concerns might arise for developers/landlords with occupiers seeking concessions.
Co-working operators, who are more exposed to short-term contracts, may face greater problems if members decide not to renew, while operators with more secured medium-term and long-term contracts will be less exposed.
Business continuity plans and remote working strategies have been successful. Hence, future demand from occupiers is likely to take into account the need for flexible workspace.