Office space demand in Chennai is expected to grow amid supply overhang

Chennai market is likely to witness an addition of about 14 million sq ft (msf) in office space in the next two years amid slow growth in demand, say industry analysts.

The supply in the office space segment has been outstripping absorption across the country over the past few years. 2023 witnessed some moderation. However, incremental supply is likely to be higher.

“In Chennai market, supply of about 14 msf is anticipated over the next two years (2024 and 2025), half of which would come up in the peripheral South and suburban South micro-markets,” said Parvez Qazi and Vasudev Ganatra, analysts of Nuvama Institutional Equities, said in a report.

The December 2023 quarter witnessed the highest-ever demand for office spaces in India, with all three southern cities of Bengaluru, Chennai, and Hyderabad registering the best performance since the pandemic.

Leasing demand is expected to increase in Chennai supported by robust enquiries from the IT-BPM sector and an increase in the supply of Grade A office space. The absorption of office space is likely to be higher in 2023 and 2024 than the annual average demand over CY15–19.

Cushman & Wakefield has projected a total new supply of 17.5 msf during 2023-2025. “A little over one-fourth of the upcoming space is pre-committed mainly by BFSI and IT-BPM sectors,” it said.

Net absorption for 2023 and 2024 are estimated at 2.45 msf and 2.5 msf respectively, largely driven by IT-BPM sectors.

Vacancy levels

Vacancy levels in India had reached 18.1 per cent in the September 2023 quarter due to supply eclipsing demand post-CY19. Hyderabad is likely to witness the highest growth in vacant office space, followed by Chennai. With the rise in vacancies, annual rental growth in Chennai is likely to be constrained (1–2 per cent).

“Amid an increase in vacancy levels from 18 per cent in 2023 to 24 per cent in 2025, the Chennai office market is expected to experience robust demand, particularly from the IT-BPM, engineering, manufacturing, BFSI and flexible workspace operator segments,” said Cushman &Wakefield.

Most cities need a significant uptick in demand for absorption of upcoming supply. Chennai, particularly, may struggle given about 14 msf of upcoming supply by CY25 against about 2 msf demand. Bengaluru and Hyderabad are also in the same boat, wherein 32–36 msf of supply is expected to come on stream by CY25 in each city.