The Grade A office market Ready supply of Tier 1 cities stands at 711.2 mn sqft. In addition to this, the market has 114.0 mn sqft being constructed.
The three years before COVID-19 saw increasing activity with diminishing vacancy levels in the Indian office market. The year 2019 witnessed a record activity in leasing with 38 mn sqft of Grade A office space being absorbed.
However, working ‘away’ from the office during the pandemic had certain implications on the demand for office spaces in the country.
The highest disruption was felt in the first wave and initial lockdown which was immediate and unanticipated. The leasing had dropped to negligible volumes and the market witnessed spaces being vacated. The subsequent period that followed saw an improvement in the leasing activity but not as much as the pre-pandemic volume. Many large occupiers deferred their space take-up and chose to adopt a cautious ‘wait and watch’ approach.
We have looked into how the Tier 1 office markets responded to the pandemic. Tier 1 cities include Mumbai Metropolitan Region (MMR), National Capital Region(NCR), Bengaluru, Chennai, Hyderabad, Pune, Kolkata, and Ahmedabad.
The data for the article is on Q1 FY 21-22 i.e. Jun ‘21. The last Twelve Months (LTM) wherever mentioned, is the period Jul ’20 to Jun ’21.
Overall Market Supply and Vacancy
Supply amounting to 38.6 mn sqft was completed and made ready to occupy in the last twelve months. 51% of the supply was only in Bengaluru and Hyderabad in markets like Gachibowli, Madhapur, Yeshwanthpur, Electronic City, and Outer Ring Road.
The leasing volume of 24.2 mn sqft was recorded in the period Jul ’20- Jun ’21. This is a 36% YoY drop in comparison to the volume of the previous year recorded at 37.9 mn sqft.
City Level Absorption and Performance
Bengaluru, NCR, and MMR hold 57% of the total ready Grade A supply, among Tier 1 cities, amounting to 402.7 mn sqft.
The cities that led the leasing activity were Bengaluru and Hyderabad together making up for 51% of total leasing. The 1 million sqft + large deals in the cities were pre-commitment agreements by large enterprises like Qualcomm, Google, Amazon, Morgan Stanley, and Wells Fargo.
The uncertainty in the atmosphere facilitated pre-commitment deals for projects on a later delivery date offering the occupiers a good breathing space. However, the downside is that these deals are subject to cancellation.
Table: Grade A office market in Top 8 Indian cities (Values in mn sqft saleable)
|City||Ready Supply||Vacancy%||Under construction||Absorption in the last twelve months||New Completion||Net absorption|
|Total Tier 1||711.2||18%||114.0||24.2||38.6||9.7|
Negative space take-up and Lease agreement terminations
While there was a dip in the absorption volume, the markets also witnessed spaces being vacated and lease agreements being terminated. Coupled with the new supply being completed, this caused the vacant space across submarkets to increase resulting in a negative absorption. The vacant space increased by 26.8 mn sqft.
The highest negative absorption was witnessed in Hyderabad and Bangalore. New supply except those under pre-commitment deals remains vacant in these markets as enterprises seek cost-cutting measures.
Bengaluru had the highest volume of spaces being vacated. Around 2.8 mn sqft of Grade A spaces were vacated in Jun-20.
Table: Market indicators of Grade A supply in Tier 1 Cities (Values in saleable mn sqft)
6mn+ sqft of office space was vacated during the pandemic
The initial months of the pandemic witnessed the termination of lease agreements even by Grade A tenants. More than 6 million sqft of Grade A office space was given up during the pandemic. Enterprises were on the lookout for cost-cutting measures to compensate for the revenue drop which resulted in real estate lease agreement terminations. 32% of the area that was terminated were by startups.
Sectorwise, the largest quantum of space given up were by the IT/ITeS and BFSI sectors. The IT/ITeS sector allows for a large share of its workforce to efficiently work from home which led to the termination of ongoing agreements and also a failure to renew agreements on expiry.
Post the second wave, there has been a shift in the trend with an increase in renewals in 2021 due to a robust vaccination strategy and a subsequent decline in the COVID cases across the country. Re-entry to offices is being planned by Indian-based companies on the complete vaccination of employees.
Supply in Pipeline
Ready supply added in 2021 were from projects due for completion in 2021 and also whose completion deadlines were deferred in 2020. Currently, there is limited construction activity and only top developers are expected to deliver in time.
Therefore, with an under-construction supply of 114 mn sqft, it is expected that 20% will be completed annually.
The pandemic disruptions to the office market were not anticipated. The future that lies ahead is different and bound to evolve.
Key Words: work from home, India office market, vacancy increase, space vacated