The demand for office space in 2016 overshadowed the residential housing segment and the trend is likely to continue in 2017. 99acres analyses factors that will drive office space absorption in the upcoming quarters.

While the residential market across India was undergoing a slowdown post demonetisation, the office space landscape remained resilient. The total net absorption that took place in Oct-Dec quarter of 2016 was nearly 40* percent of the total net absorption throughout the year. 

According to a report by Cushman & Wakefield, office space net absorption across top eight cities during 2016 was a phenomenal 34 million sq ft. Bucking the downtrend, Bangalore’s net absorption climbed up by 28 percent to 12.7 million sq ft. Soaring 14 percent from a year ago, Hyderabad secured the second spot in terms of highest absorption levels in the segment for the first time since 2010 with a net absorption of 6.3 million sq ft. Similarly, demand in Mumbai also bounced back with the financial capital of India witnessing a four percent increase in net absorption, standing at 3.3 million sq ft. Encouraged by such strong demand from occupiers, more and more commercial realtors are gearing up to complete their projects in 2017.

While the total absorption figure for the first quarter of 2017 is yet to be revealed, analyses growth stimulators as well as challenges that will decide the future of office space segment across top cities in the next few quarters.

Growth drivers

  • The office space requirements of sectors such as Fast Moving Consumer Goods (FMCG), manufacturing and logistics exhibited positive signs in 2016. Experts expect this trend to continue in 2017. “Many start-ups and large consulting firms are expected to increase their headcount to accommodate their business growth. Intuitively, this will have a positive impact on the office space demand,” says Satyendra Tomar, an investment expert and serial entrepreneur.
  • Earlier, many Indian Information Technology (IT) firms preferred constructing their own campuses. However, these companies now prefer to lease. The biggest examples are Indian corporates such as Infosys and TCS that have started displaying an inclination towards leasing versus buying, particularly in Bangalore. This adds more volume to office space requirements in the years to come, including 2017.
  • Supply of around 45-46* million sq ft is expected across the top cities in 2017. “This 26-28 percent increase in space which would cater to the strong demand from sectors such as IT, Business Process Outsourcing (BPO), and Banking, Financial services and Insurance (BFSI). With better regulatory environment in 2017, developers should be able to step up the pace of construction of new office spaces,” explains Tomar.
  • Real Estate Investment Trusts (REITs) will continue helping smaller investors to invest in Grade A spaces across India. Currently, around 229# million sq ft of office space can be seen as REIT-compliant. The implementation of Real Estate (Regulation and Development) Act (RERA) is expected to result in more REIT-compliant spaces. This way, more and more office assets will become institutionalised in 2017.
  • Innovative office spaces with open areas (such as Google) aimed at boosting employee productivity will gain more importance in 2017. “Going ahead, technically-enhanced offices with a focus on sustainability will command higher rents,” avers Pooja Kundu, Managing Director, PropCurve Solutions Pvt Ltd.

Challenges ahead

  • Many experts feel that the vigilant expansion strategies by corporates, lower Gross Domestic Product (GDP) due to demonetisation, and uncertainty in the global economy due to the political scenario in USA will put pressure on Indian real estate during the first half of 2017, which may, in turn, see slower growth in the demand for office space.
  •  In technology-driven markets like Bangalore, Hyderabad, Pune and Chennai, the demand-supply gap will remain a concern in the coming quarters of 2017. As only a few Grade A office buildings are likely to witness completion towards the end of 2017, it will exert upward pressure on rents during the first half of the year in these markets. This may lead to growing multi-national companies settling in budget-friendly Asian markets such as the Philippines. Apparently, Mumbai is already suffering such a disadvantage. As per a Cushman & Wakefield report, Mumbai is expected to witness a decline in cumulative demand during 2017-2020, largely due to higher rental values.
  • “To reduce their financial burden, more start-ups may turn towards co-working spaces. This may lead to higher vacancy levels, especially in Delhi-NCR and Bangalore,” predicts Kundu.
  • India’s commercial realty is led by the IT sector. However, the sector is becoming more process-driven and less people-driven. Due to automating processes, a company with a one billion USD may require only 20,000 employees in place of the current requirement of 35,000. This could pose a potential threat to office space demand in 2017.

* As per a report by Cushman & Wakefield | # According to JLL India’s data