Office space supply in the top metros likely to drag down absorption

Supply may be double of demand by fiscal 2022-2023

A glut of office properties over the next few years in the top metros is expected to drag down the absorption of spaces.

Supply of office spaces will be double the expected absorption in Mumbai, Delhi-National Capital Region, Bengaluru, Hyderabad, Pune, and Chennai between 2020-21 and 2022-23, revealed data by India Ratings and Research (Ind-Ra). 

Abhishek Shukla, associate director, Ind-Ra, said, “Delays triggered by the Covid-19 pandemic notwithstanding, offices where construction had started before the contagion kicked in are seeing no let-up because of supply outstripping demand.”

However, net incremental absorption is likely to be roughly 40 per cent lower than the average annual levels prevailing before the pandemic. “This is because work-from-home is likely to see a reduction in new demand and potentially some surrendering of old leases by the lessees as they adopt hot-desking policies. This is likely to result in downward pressure on rents. More so for under-construction properties trying to find tenants in an oversupplied market,” said Shukla.

The decline in rents for fresh take-ups could be more than 30 per cent as supply overtakes demand, he added. According to Ind-Ra, the vac­ancy in office spaces will go up from 12 per cent in 2020 to 17 per cent by 2023. However, top office developers such as DLF have a different take.

Sriram Khattar, managing director, DLF Rental Business, believes demand will come back after vaccination and top developers will stand to gain. 

“It may not be appropriate to form a view on a national level. In micro-markets, which are preferred destinations for information technology and information technology-enabled services, the potential tenants will likely go for credible and trustworthy developers known to create safe and sustainable workspaces with adequate infrastructure,” said Khattar.

At present, the tenant companies are working out their space solutions after Covid. “After substantial vaccination in the next two to three mon­ths, demand will resurface,” he said.

Raj Menda, corporate chairman at RMZ Corp, said, “In Covid, banks and funding institutions have taken a conservative stance and lending only to better-rated developers. This approach will reduce supply. Only bigger developers will continue to attract multinationals for pre-lease.”

Badal Yagnik, managing director, tenant representation at Cushman & Wakefield India, said, “Historically, it has always been the case in India that net absorption has been lower than actual supply.  While markets recover over the next two to three years, there will obviously be more activity. While supply may increase, what is important to note is that vacancy in institutionally-owned stock and larger Grade A developments will continue to remain in single digits.”

Given India’s stock level and current vacancy rates, the anticipation of a recovery will not allow more than a 300-400-basis point increase in vacancy. 

This will still keep India’s overall vacancy level to below 20 per cent, which is still lower than some of the emerging markets in the Asia-Pacific region, said Yagnik.