Things are gradually falling in place for the Indian commercial real estate sector, translating into higher demand for Grade-A offices. Unlike the residential segment, which had a subdued September quarter (Q2FY25), office leasing trends present a more optimistic picture.
Net absorption of commercial real estate across India’s top seven cities stood at a robust 10.2 million square feet (msf) in Q2FY25, marking a 23% year-on-year increase and a 9% sequential rise, according to Propstack data compiled by Kotak Institutional Equities. New office space supply also saw growth, reaching 11 msf during the quarter, an 8% increase year-on-year and 18% sequentially. Despite this influx, vacancy levels dipped a modest 13 basis points sequentially to 14.1%, as per the Kotak report dated 2 December. One basis point is one-hundredth of a percentage point.
Both global and domestic occupiers have contributed here, but Global Capability Centres (GCCs) remain in the driver seat, pushing occupancies higher across key geographies. GCCs are typically foreign companies that establish their back-office operations and R&D activities in India.
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Indian companies have also been contributing as they continue to implement return-to-office policy. According to a recent survey by global property consultant JLL, about 90% of Indian firms have adopted a three-day office presence per week, outpacing the global average of 85%. The same survey, released on 28 November, indicates that two-thirds of Indian firms anticipate longer lease tenures over the next five years, and an increase in total office footprint.
IT sector recovery and flexible workspaces
True, the slowdown in India’s information technology (IT) sector—once a major driver of office leasing—had a significant impact on commercial real estate. However, after several quarters of headcount reductions, tier-1 IT companies reported adding employees in Q2FY25, signalling a positive shift for office space demand. Additionally, flexible workspaces are seen as a consistent demand contributor for commercial leasing.
The market share of flexible workspaces in overall leasing has remained steady at 12-15% over the past five years and this trend is likely to sustain in 2024, according to CBRE.
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What has also helped push occupancies higher is the floor-wise SEZ (special economic zone) denotification. This has allowed commercial realty firms repurpose the vacant SEZ areas, which make for the bulk of vacancy for large commercial office owners, into non-SEZ areas.
No wonder then that listed Indian REITs (real estate investment trusts) managers are brimming with confidence. For instance, the management of Embassy Office Parks REIT has raised FY25 leasing guidance to 6.5 msf from 5.6 msf earlier, and expects occupancy to touch 88% by FY25. Brookfield India Real Estate Trust’s management has maintained its guidance of ending FY25 with 87–89% occupancy from 85% currently.
For Mindspace Business Parks REIT, overall portfolio occupancy stood at around 90% in Q2FY25, and the management targets to increase this to 93.5% by the end of FY25. REIT managers are widely expected to manage a bounce back to pre-pandemic portfolio occupancy levels of over 90% by FY26.
All said, despite a reduction in vacancies across top cities, average rentals at a pan-India level have remained range-bound in recent quarters. Recently, there has been a growing preference among potential occupiers for green-certified office spaces.
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These resource-efficient buildings are designed to minimize pollution and conserve energy. Green-certified office spaces are expected to command a 10–12% premium in rentals compared to non-certified assets. However, with new supply entering the market and gradual improvements in absorption, a spurt in office rentals remains unlikely.
