India today has the third largest startup ecosystem in the world after the US and China. India currently has 108 unicorns. Owing to this boom, startups can be expected to occupy millions of sq. ft. of additional office space in the next few years. While key metros are likely to lead absorption trends, the real estate market in Tier-II cities is experiencing exponential urbanization as investors, entrepreneurs, developers and occupiers backed by government envisage immense business potential.
According to the UN’s World Cities Report 2022, more than 37% of India’s population would reside in urban centres by 2025, and this number is likely to touch 43% by 2035. The fact remains that the growing urban sprawl would spread beyond Tier-I cities, so that Tier-II cities can take on the mantle of the future. Recognizing this need, the government has been undertaking measures to plug in the prevailing infrastructure / business gaps that would boost the development of these cities.
A growing number of entrepreneurs are driven to address challenges and serve Tier-2 markets. Both entrepreneurs who hail from these cities strive to make a difference while others see untapped business opportunity. The Ministry of Trade and Industry recently said that nearly 50% of the recognized startups in India now hail from Tier-II and Tier-III cities.
The Move
Tier-II cities has been poised to be the upcoming growth vectors in India – driven by their progress in the real estate landscape, operating environment, quality of life and sustainability. However, the traction remained tepid until the pandemic which acted as a catalyst and has accentuated the activity levels in Tier-II markets to a large extent. We have seen reverse migration for various reasons such as quality of life, savings, work-life balance, among others causing organizations to set up offices / expand to these markets. Tier-II cities are now touting their proximity to urban areas.
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Talent availability, local investor confidence, and infrastructural support have all aided the growth of entrepreneurs and Startup in these markets. Startups are capitalizing on the talent pool emerging out of universities which has largely remained untapped. Tier-II markets act as an alternate or a supplement workplace as Tier-I cities face increasing salaries, increasing OPEX and CAPEX, over urbanization, among others. Tier-II cities has enabled a platform for remote employment while keeping operating costs low.
Startups in Tier-II cities can pilot their business models in a smaller market and can serve as a cost-efficient option during its bootstrapped phase. In the last five years, many startups have risen, not only from Tier-I cities but also from Tier-II cities. Some that started in Tier-II markets went on to either move their HQ to Tier-I cities or open additional offices in Tier-I cities as part of their growth strategy. Also, startups based in Tier-I cities that service all corners of the country, often set-up supporting offices in Tier-II cities as hubs to service far to reach locations in India.
Real estate availability of quality & compliant grade A space has been a challenge in most of the Tier-II markets. With increased uptake of space in these markets, developers are looking at enhancing capacities to cater to the growing demand. Several prominent developers such as DLF, Godrej Properties, Mahindra Lifespaces, Brigade, Lulu, Prestige, Embassy, L&T, etc. have a presence across these cities.
Flexible workspace operators are also stepping into these markets to offer solutions to corporates for their real estate needs. They are building their expertise in these markets and are customizing solutions for the startup fraternity, resulting in an increase in demand.
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What’s Next?
Startups are known to change the status quo and question age-old ways of doing business. As organizations work towards balancing workplace productivity and employee preferences, we will continue to witness a shift in the what and the where of workplaces. This, coupled with the need for maintaining a healthy work/life balance, will enable businesses to redefine office spaces.
What’s essential to note is that the ‘physical office’ will continue to evolve as a catalyst for solidifying corporate culture, collaboration and team building. While metropolitan cities are likely to remain the core centers for startups, business potential, low cost of living, reduced CAPEX, and the trend to work from anywhere in cities outside of metropolitan areas will continue to propel startup leasing in Tier-II cities.
As we move forward, treading this path involves pushing boundaries, defining opportunities for growth and exploring nascent territories – something our Tier-II cities have in abundance and therein lies the growing attraction of this industry towards these locations. We can be positive that harnessing their economic and development potential will push these cities to the forefront of Indian business landscape.
(By Anshuman Magazine, Chairman & CEO – India, South-East Asia, Middle East & Africa, CBRE)