By Raghavendra Kamath

Vacancies in office properties are set to go up further as supply is expected to overtake demand in the coming years, analysts tracking real estate companies said.

“Going forward, we are of the view that with headline supply of 133 million square feet scheduled for completion over Q4CY22-CY24 (October 2022 to December 2024) and assuming that annual net absorption ranges between 30-35 million sq ft, headline vacancy levels at pan-India and individual city level may rise further over the next 24-30 months, ” said Adhidev Chattopadhyay, vice-president , equity research — real estate and hotels at ICICI Securities in a report released on Wednesday.

Overall vacancies have risen from 16.9% in Q3CY21 to 18.3% in Q3CY22, he said in the report.

However, Chattopadhyay said that with supply-demand equilibrium remaining stable in preferred micro-markets such as Sarjapur/Whitefield in Bengaluru, Madhapur in Hyderabad, Cyber City in Gurugram, Kharadi in Pune and pre-toll OMR in Chennai, vacancies in these markets may rise marginally even as overall vacancy levels may trend higher.

According to an update released by Nuvama Research, during Q3CY22, office space demand shot up 113% year-on-year to 8.9 million sq ft (down 4% quarter-on-quarter), but supply came in at 14.8msf (up 114% year-on-year/23% quarter-on-quarter).

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“This was the twelth consecutive quarter when demand trailed supply. Vacancies rose 160 basis points year-on-year to 18.2% (up 40 basis points quarter-on-quarter). Bengaluru, Hyderabad and the NCR generated the bulk of demand. Vacancies decreased quarter-on-quarter in Bengaluru, Pune and Kolkata, but increased in other cities,” Nuvama Research said.

Bengaluru is the only city that still enjoys single-digit vacancy (compared with four cities in Q3CY20). Rents improved quarter-on-quarter in the MMR, Chennai and Pune, but stayed flat in other cities, it said .

Quoting JLL, it said that space requirements currently active are 36–38 million sq ft,the same over the past one year, indicating the robustness of demand pipeline. However, it would still undershoot supply (50–55million sq ft) over the next year. “Consequently, we expect vacancies to increase, putting pressure on rentals. Upcoming office supply of ~136 million sq ft by CY24 implies an uptick of 19% year-on-year compared with Q3CY21. Even if some of this is deferred, supply is likely to be enough to keep the demand-supply equation unbalanced. We believe this would keep vacancies high and rental growth constrained over the medium term,” it said.

Abhishek Kiran Gupta , CEO & co-founder, CRE Matrix & IndexTap, said:”Vacancy will rise at micro-markets and buildings that are Grade B type as all aspirational tenants seek occupancy in Grade A buildings. During the pandemic, Grade A building were trading at discounted rental value, making it attractive for Grade B building occupies to move to Grade A buildings. So net view is that Grade B projects vacancies can rise but vacancies of Grade A buildings will most likely stay firm or fall over the next 12 months.”nAmidst the rising trend of vacancies , real estate investment trusts or REITs have shown a resilience. For instance, vacancies at Embassy REIT have stayed at flat 13 per cent in both Q1 and Q2 of   FY23.

Vikaash Khdloya, CEO, Embassy REIT attributed company’s performance to high quality properties and growing demand for good properties .

“Our overall occupancy continues to be resilient at 87% for our large 34 million sq ft operating portfolio. We continue to deliver strong leasing and have already achieved 3.4msf in H1 which is 70% of our annual guidance for FY23. We optimise for NOI growth and not focus purely on occupancy – so as you can see our occupancy has been stable, our H1 NOI has increased by 11% vs H2FY22, “Khdloya said.

India office demand continues to remain robust and benefits from the dual structural advantages of an unmatched talent hub of the world combined with significantly lower rentals of around $1-2 per sq ft per month, which gives a unique positioning to the India office sector. While there are growing concerns of slowdown in the developed markets, any recessionary environment in the respective home countries of global corporates, will further accelerate India’s office demand, he said.

However, Chattopadhyay of ICICI Securitires said that while vacancy levels for office portfolios of REITs have increased by 600-900bps since Q1CY20 (January to March 2020) in line with rise in industry vacancies, the key monitorable for REIT office portfolios over the next 12 months would be REIT managers’ ability to buck the trend of rising vacancies at industry level and recover the lost occupancy (getting back to pre-Covid levels).