Commercial real estate shows bright prospects for growth

Commercial real estate is showing green shoots with a strong performance in June 2022 quarter. The sector saw the highest-ever quarterly absorption in the last 10 years as office and industrial space demand has gained momentum supported by economic revival and in anticipation of return-to-office trend.

All-India commercial real estate currently has an outstanding inventory of 586 million sq ft (+8% YoY) with a gross absorption of 22.5 million sq ft (net absorption of 11.8 million sq ft) seen during the June 2022 quarter (+2.8X yoy), significantly ahead of the 11.8 million sq ft of supply addition during the quarter.

Highest ever

This gross absorption of 22.5 million sq ft was the highest-ever quarterly absorption since FY2012. We highlight that absorption activity in Q1 FY23 remained strong and is likely an indicator of impending return-to-work policies of several large IT/ITES companies that are looking to accommodate record employment in the past two years, pointed out a report by Kotak Securities Ltd.

New supply saw a sequential increase to 13 million sq ft in the quarter, up 85% YoY on a modest base, resulting in a vacancy of 89 million sq. ft (15%), similar to March 2022. Among the cities, Bengaluru and Hyderabad saw a new supply of 3 million sq. ft and 4 million sq. ft, respectively, during the first quarter of this fiscal.

“The rental business is on a steady path to recovery with occupiers now returning to workplaces,” Rajiv Singh, Chairman, DLF, said while addressing the company’s annual general meeting last month.

Brigade Enterprises said its leasing of office space doubled during the first quarter of this fiscal as compared to a year-ago quarter and the forecast for the following two quarters looked positive. Prestige Estates also said office leasing was quite strong and it had minimal vacancies of about 3% or 5% and the demand was looking good.

Kotak’s report

Rental growth in Bengaluru stood at +17% on a sequential basis, followed by Chennai at +8% and Mumbai (MMR) at +4%. Vacancy at the all-India level stood at 15% in 1Q FY23, with Noida and Gurugram continuing to have elevated vacancy levels of 30% and 27%, respectively, said the report of Kotak Securities.

According to its analysis, gross absorption for the top asset owners for Q1 FY23 showed healthy trends, with DLF clocking 1.9 million sq ft of gross leasing, followed by Mindspace (0.5 million sq. ft). “Occupancy for these office portfolios appears to have stabilised, along with a steadying pipeline of lease expiries, as tenants are no longer opting for pre-termination of lease agreements,” it said.

In larger agreements, the Bengaluru market topped the charts, capturing 5 out of 10 large leasing agreements worth 1.3 million sq ft. Hyderabad, aided by two separate transactions from Cognizant (766K sq ft), closed in the second spot in Q1 FY23 with 1 million sq. ft of gross leasing. In Q1 FY23, Chennai saw two transactions (0.9 million sq ft) and Pune saw one leasing transaction (423K sq ft).