Net office space absorption in the March quarter has declined 36% from a year ago as companies review their office property portfolios, adopt consolidation and optimisation strategies to rationalise space requirement while minimising costs.
Office space leasing during the quarter stood at declined 33% sequentially to 5.53 million sq ft after rallying for two successive quarters despite the outbreak of the pandemic last year, showed data from JLL India.
Pre-commitments in new completions played a significant role in driving net absorption. In the first quarter, 31% of the new completions during the quarter were already pre-committed. Maximum pre-commitment levels were observed in the southern markets of Bangalore with 51% of the new completions and Hyderabad with 45% of the new completions.
“While 2020 ended on a relatively high note, there was still uncertainty in the market with respect to resumption of business as usual. Occupiers continued to adopt a cautious approach and focused on reassessing their real estate portfolios and long-term commitments. To add to the woes, increasing fears of a spike in COVID-19 cases in the second half of March further pushed the occupiers to press pause again and postpone their real estate decisions,” said Samantak Das, Chief Economist and Head of Research & REIS, India, JLL.
According to him, as the vaccination drive is gaining momentum and occupiers remain cautiously optimistic, the year 2021 is expected to witness close to 38 million sq ft of new completions, while net absorption is likely to hover around the 30 million sq ft with a marginal downward bias. This will be at par with the average annual net absorption levels seen during 2016-2018.
Interestingly, the leasing momentum in some of the larger markets have remained promising in the first quarter of 2021. The quarter witnessed gross leasing volumes of 7.5 million sq. ft across the top seven markets.
Realty developers are optimistic that the absorption will start moving up again once the Covid situation improves with better visibility on economic outlook.
“The second lockdown shall have an impact on the sales of commercial real estate premises, however, as witnessed after the last lockdown, as soon as the restrictions were lifted the industry recorded a good demand in residential and commercial real estate sales. Hence we are hopeful that after the current situation eases, the demand should gradually be back on track. We will also request the government to bring in the stamp duty reduction back to encourage probable buyers to return back to the market,” said Aditya Kedia, Managing Director, Transcon Developers.
During the March quarter, the larger market of Mumbai saw a massive jump in leasing volume at 1.6 million sq ft from 0.5 million sq ft in the previous quarter. This was majorly driven by select large pre-commitment deals in upcoming spaces within the banking, financial services and insurance (BFSI) space. Further, Delhi-NCR saw a marginal increase in leasing volumes at 2 million sq ft from previous quarter’s 1.9 million sq ft.
Bengaluru, Hyderabad and Delhi NCR accounted for nearly 80% of the net absorption during the quarter. Moreover, Bengaluru and Delhi NCR were the two markets which witnessed a sequential increase in net absorption.
New completions during the quarter were recorded at 13.43 million sq ft, a marginal increase of 5% on-quarter. In sync with net absorption, the markets of Bengaluru, Hyderabad and Delhi NCR accounted for nearly 80% of the new completions during the quarter. On on-year basis, new completions across the top seven cities jumped by 56%.
Interestingly, new completions even surpassed the average quarterly levels of nearly 13 million sq. ft witnessed during the historic year of 2019.
Office rents during the quarter remained stable across the major office markets in India. With vacancy levels still below 15% and limited upcoming grade A supply across key markets in the next few years, the office market in India continues to be tilted towards landlords.
Reduction of headline rents is not a popular phenomenon and rents are expected to remain range bound in the short to medium term. However, landlords continue to be accommodative to the demands of occupiers and are providing flexibility via increased rent-free periods, reduced rental escalation and fully furnished deals to occupiers to close deals.
The leasing momentum in the upcoming quarters is expected to mainly depend on the time taken to contain the second wave of COVID-19 cases. The increasing attendance in offices across the major markets before the second COVID-19 wave bears testimony to the confidence and commitment of corporates to get back to working from office.