Office rentals go up in central biz districts

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As far as the impact of inflation and slowdown of economy on office rentals is concerned, no clear trend in the real estate sector is emerging. While in the central business districts (CBD) the rentals are moving up, in most micro markets they have stabilised. In certain markets, they have gone down due to oversupply.

According to a CB Richard Ellis report, since the supply is limited in CBD and Alternate Business District (ABD) in the face of increasing demand, it is not surprising the rentals are going high in these areas. New stocks are only expected by the end of the year. Till then rental and capital values are not likely to alter in these areas.

While this is one side of the picture, the other side of the spectrum is that vacancy rates are going up in certain areas because of over supply and a slowdown in the IT/ITes segment. This trend is confirmed by a recent report of Cushman & Wakefield where it discusses the developments in the same quarter.

The scene was quite different just a year ago. There was a demand supply mismatch across the board with demand clearly outstripping the supply.

Even in the third quarter of 2007 the National Capital Region (NCR) area had a huge demand for commercial space. This demand was driven mainly by IT/ITes sector along with other sectors. Disparity in the demand supply ratio led to a lot of builders coming up with office spaces in these areas. Right now the same areas are lying vacant because of a slowdown in the real estate sector, a trickle down effect of the slowdown in the economy.

According to a CBRE report which was published in the third quarter of 2007, “In addition to a shortage of Grade A space with immediate availability, another contributing factor was the increased financial exposure. With the introduction of Service Tax on commercial rentals and a likelihood of the Municipal Property Taxes being increased considerably, Mumbai has become one of the most expensive cities in the world for commercial real estate in terms of Net Occupancy Cost.”

It also said, “As a result, some organizations are now revising their requirements downwards while others are shifting back office and support staff to cheaper micro markets in the suburbs.”