Office rental value rises 7% in top 7 cities despite tepid leasing in H1

The first half of fiscal year 2024 remained lacklustre for commercial office space activity across the top seven cities, with both net absorption and new completions remaining largely stagnant compared to same period last year.

Talking to Bizz Buzz, Mohit Batra, Regional Director, Realistic Realtors said, “The rising demand and a diminishing supply for Grade A office space in prime locations is leading to a simultaneous increase in office rentals. Both international and Indian corporations are proactively searching for enhanced office spaces to accommodate the growing needs of their expanding businesses. Consequently, there is a noticeable shift towards strategic business districts like Golf Course Extension Road (GCER), which offer superior amenities stemming from new developments and are meticulously planned to cater to future business requirements.”

A clear upswing in the demand for Grade A office spaces is evident in the prime business districts of Gurugram, including locations such as DLF Cyber Hub, Golf course road and Golf Course Extension Road. Over the last couple of years, rentals in these sought-after office buildings have experienced a substantial increase, with some witnessing a rise of up to 20 per cent.

New office supply across the top seven cities rose by a meagre 5 per cent in H1 FY24 against H1 FY23, and net office absorption saw a marginal yearly decline of 1 per cent in this period.

Prashant Thakur, Regional Director & Head - Research, ANAROCK Group, said, "Interestingly, average rental values across the top 7 cities witnessed a 7 per cent growth in H1 FY24 when compared to the same period in FY23, essentially due to increased construction and input costs. The Research data indicates that Grade A office rental values averaged at Rs 83 per sq. ft. per month across the top 7 cities in H1, while in the corresponding period in FY23, it was approx. Rs 77.5 per sq ft."

Notably, Chennai witnessed the highest 10 per cent yearly jump in average monthly office rental values – from Rs 62 per sq. ft. in H1 FY24 to Rs 68 per sq ft in H1 FY23. Hyderabad came next with an 8 per cent yearly growth. The average monthly office rental value in the city rose from Rs 61 per sq ft in H1 FY23 to Rs 66 per sq ft in H1 FY 24.

“It was widely anticipated that commercial office space demand in India will see a downturn amid layoffs by several large corporates worldwide, and shrinking business volumes," says Thakur. "However, despite all headwinds, office activity remained largely unchanged in the first half of FY 24 as compared to the corresponding period in FY23. New completions saw a meagre 5 per cent yearly jump in the period and net absorption dropped by just 1 per cent.”

In terms of sector-wise net absorption, IT/ITeS continues to dominate leasing transactions in H1 FY24. However, the sector’s overall share in leasing has been on a decline year-on-year. In H1 FY20, the share of IT/ITeS sector in overall leasing was a whopping 46 per cent, while in H1 FY24, its share dropped to just 29 per cent.

Consequently, the share of coworking spaces has been on the rise – from 11 per cent in H1 FY2020 to 24 per cent in H1FY2024. This denotes a shift in the leasing trend by many corporates of various sizes who now see flexible workspaces as a viable and more cost-effective option.

Amid increased office space completions, vacancy levels across most top cities rose marginally except in NCR, MMR, and Kolkata. The average vacancy rate of Grade-A offices in the top 7 cities collectively increased by 0.95 per cent - from 15.9 per cent in H1 FY23 to 16.85 per cent in H1FY24.

An analysis of annual variations in average vacancy rates across the top 7 office markets shows that Pune currently has the lowest at 8.3 per cent. NCR, MMR, and Kolkata witnessed a Y-o-Y reduction in vacancy levels with 0.8 per cent, 0.45 per cent and 0.1 per cent, respectively. Chennai maintained equilibrium in its vacancy rates throughout the period.

While Indian commercial office space demand doubtlessly faces short-term challenges in the current global environment, the mid-to-long-term outlook remains positive, considering that Grade A offices are still available at sub-dollar rents. Stability in the office market may return from the second half of 2024.