Residential property prices may be moving up across cities, but that luck is eluding the office leasing space. Real estate consultants say office property markets in the country are expected to remain sluggish in the months ahead due to challenges faced by western economies.
Corporates from the US and Europe are delaying their leasing decisions due to issues back home, which is hitting the office markets badly, consultants said.
About 10 million sq ft of corporate request for proposals (RFPs) were withdrawn or deferred in the second half of 2022, when looming recessionary threats in the major economies and slowdown in hiring by Indian IT & ITES firms caused benign demand, according to Anarock Property Consultants.
Net office leasing has dropped to 34% in January-March to a six-quarter low across the top seven cities of the country, as per property consultant JLL.
According to a senior consultant, who did not want to be quoted, it is the first time since the Lehman Brothers’ crisis in 2008 that office rents in top cities are stagnant or falling.
Average office rentals across the top seven cities in the first half of 2022 stood at `78 per sq ft, which increased marginally to about `80 per sq ft in the second half of the year, according to Anarock.
Average residential property prices across the top 7 cities, however, increased 6-9% in Q1 2023 compared to Q1 2022, mainly due to the increase in prices of construction raw materials and overall rise in demand. Mumbai Metropolitan Region and Bengaluru recorded the highest annual jump at 9%, Anarock said.
Anuj Puri, chairman, Anrock Property Consultants, said, “As we had predicted earlier, 2023 will be a slow year for office leasing due to the slowdown in the major economies, resulting in slow expansion plans from the corporates. In the first half of 2022, there was a strong momentum in the office market, but this fizzled out in the second half.”
Puri said vacancy levels will inch up due to muted demand on the back of increased supply, while rentals will remain stagnant. Demand for office space from Indian start-ups is also likely to remain low in 2023, and flexi office spaces will gain further ground, he added.
Vivek Rathi, director-research at Knight Frank India, said, “Currently, in 2023, office rents remain stable in most Indian cities in the wake of pressure seen in key information technology sector client markets of the US and Europe.”
Rathi said Knight Frank expect that the inter-linkages of the global economy will create some pressure and hold the potential to delay some office expansion plans. “However, as stability re-emerges in client markets later this year, driven by strong India office market fundamentals, the momentum will again march towards the high demand seen in 2019,” he said.
In his outlook for office markets, JLL said that although Q1 2023 has seen a slight decrease in leasing activity, it is too early to conclude that the office market is sluggish. “Q1 2023 had the highest leasing activity compared to the same periods in 2021 and 2022. However, space requirements have decreased 15-20% due to delayed decision-making and global economic headwinds, which may continue to impact decisions in the space throughout the year,” it added.
Some investors and developers do not think that situation will be bleak for office market this year.
Sharad Mittal, director and CEO, Motilal Oswal Alternates (real estate funds), said that pan-India vacancy levels have increased on account of stronger supply infusion compared to net absorptions. “However, while the overall vacancy has increased, core office markets in major cities continue to have tighter vacancies,” he said.
“Flexible seat leasing has seen an all-time high, crossing the pre-pandemic peak of 2019 by more than two times, he said. “Rentals across cities have seen an increase with owners in core markets remaining firm during rent negotiations. This trend is expected to drive rental growth even further in Grade A commercial assets. Driven by the growth/outsourcing story, India is expected to see continued robustness in its office market with performance being similar to the one seen in 2022,” Mittal said.
Mahaveer Shankarlal, director – corporates, India Ratings and Research said :”With weak global macro environment and layoff there could be slow down in leasing activity. But historically we have seen it is not always negative as the outsourcing and demand for global captive operations and long lead time for property development, limited supply of grade a development may protect the downside. India office space has structural advantages of demography, low relative lease rates and low manpower costs which the absorption steady.
Raj Menda, corporate chairman at RMZ Corp, said, “As companies in the West need to save costs, the only option is to outsource their IT SaaS (software as a service) work to India. So, the latter part of the year will see a huge traction.”
Menda said some US companies are delaying leasing decisions as they have to first get internal approvals for their consolidation strategy.