Track2Realty: Office markets in India registered a downward trend in overall net absorption for the first three quarters of 2013, as per the latest report released by global real estate consultants, Cushman & Wakefield.
The overall net absorption across top eight cities in 2013 was noted at 16.2 million square feet (msf), which was a decline of 15% compared to the same period last year. The net absorption for Grade A spaces till Q3 2013 was recorded at 15.2 msf, registering a decline of 7% y-o-y.
The third quarter also witnessed a decline of 27% and 19% respectively in net absorption for All Grades and Grade A spaces from Q2 2013. A noteworthy trend in net absorption this year was the increasing preference for Grade A spaces.
The contribution of Grade A spaces to the overall net absorption till Q3 has increased to 93% as compared to 86% last year during the same period. The quarter-on-quarter (q-o-q) Grade A net absorption increased from 94% in Q2 to 104% of the overall net absorption in Q3 2013.
Slower economic growth has led to the decline in expansion by companies as cautious sentiments have continued since the beginning of the year. While the second quarter had seen a marked improvement in overall office space net absorption due to expected improvement in growth and productivity, it declined in the third quarter.
However, the past few quarters have seen an increasing trend of relocation amongst companies. Across top cities, companies are relocating from Grade B and C spaces to quality Grade A developments. Majority of these relocations are from CBD and Off-CBD locations commanding higher rentals to more affordable suburban and peripheral locations. Such locations have been able to maintain the demand despite the lull in the markets due to the superior quality of office spaces being offered at competitive pricing along with better amenities.
Many cities have also seen big IT companies relocate from one building to another building within the same micro market due to cost advantages. Also, in the tough economic conditions, many companies have consolidated their multiple offices, spread across the city, to a single large office to maximize operational efficiencies.
During 2013, Mumbai recorded the highest overall net absorption of 3.57 msf in all grades followed by Bengaluru and Pune at 3.04 and 2.99 msf respectively. However, Mumbai, Bengaluru and Chennai (in due order) contributed to the highest net absorption in Grade A spaces.
Mumbai and Bengaluru saw a decline of 28% and 7% in overall net absorption compared to the first three quarters of 2012. Chennai and Pune were the only cities to record a positive growth of 4% and 56% respectively in net absorption in the first three quarters of 2013 compared to same period last year. Both NCR and Kolkata registered the highest decline of 41% each in overall net absorption followed by Ahmedabad recording a 37% drop and witnessed net absorption of 1.80 msf, 0.67 msf and 0.35 msf respectively.
Q3 2013 (July – September) recorded an overall net absorption of approximately 5.3 msf, which was a decline of 15.5% compared to the same period last year and a decline of 27% from the second quarter of 2013.
Total leasing activity across the top eight cities saw an overall increase of 8% for Grade A spaces and 9% for All Grades till Q3 2013 as compared to 2012 numbers. Bengaluru, Chennai and Mumbai dominated the total volume of leasing activity, in the same order. However, the increase in leasing activity in 2013 was highest in Bengaluru, Chennai and Pune compared to the same period last year.. In quarterly comparisons, Ahmedabad, Chennai and Pune witnessed a positive trend in leasing.
Similarly, fresh overall supply for the first three quarters of 2013 also declined by 16% and was recorded at 24.3 msf. Although, Grade A supply during the same period was noted at 22.0 msf, registering a 7% decline compared to 2012, contribution of Grade A supply as a percentage of total supply increased from 82% to 91% for the same period.
This depicts the increasing bias of developers towards Grade A developments to generate demand amidst a sluggish market. Vacancies for the top eight cities across all grades increased marginally and the overall vacancy rate was noted at 19.2% at the end of the third quarter.
Sanjay Dutt, Executive Managing Director, South Asia, Cushman & Wakefield said, “The growth in leasing was dampened in the third quarter primarily due to continuing negative market sentiments as a number of companies continued to delay their investment and expansion plans given the recent downslide in the Rupee’s value, current US federal government policies and stubborn inflation., Amidst this sluggish scenario, Grade A spaces offering good work environment at comparatively reasonable costs in suburban and peripheral markets have seen good demand. Many companies are relocating to such markets from CBD locations in a bid to cut costs, improve quality of work spaces and even reduce travel time for employees. Even though companies have been cautious in their expansion, the trend is expected to improve, albeit slowly as more positive measures are introduced by the Government. By the end of the year office space absorption is expected to be at approximately 24 – 26 msf with markets such as Bengaluru, Pune and Mumbai leading the trend. Hence, the office markets have been witnessing significant interest for preleased office spaces by institutional investors and private equity funds and also from some domestic corporate houses wishing to take advantage of the current low capital values prevailing in some of the key office markets across the country. Developers faced with liquidity issues have been offering competitive pricing for their projects and we expect healthy activity in the segment.”
Ahmedabad
Overall net absorption in Ahmedabad for the first three quarters of 2013 was recorded at 0.35 msf, a decline of 37% compared to the same period in 2012. Net absorption among all grades of offices for the third quarter stood at 76,000 sf, registering a marginal decline of 6% from the previous quarter while Grade A net absorption recorded an increase of 26% q-o-q.
The city saw the lowest absorption and leasing activity across top eight cities during the year. Though most of this absorption was concentrated primarily in the suburban submarkets of Prahladnagar and S.G. Highway, the existing high vacancy levels in these submarkets have led to a 6% decline in quoted rentals in S.G. Highway and Prahladnagar. Low levels of pre-commitments in upcoming projects are expected to result in an increase of vacancies, thereby inflicting additional pressure on rentals in these two submarkets.
The city witnessed no new supply in the last two quarters. This has led to a decline in vacancies compared to a year ago despite the low transaction activity. Grade A vacancies have declined by 1.7 percentage points q-o-q to 31.3% while All Grade vacancies have dropped by 0.5 percentage points in the quarter to 14.2%.
Rentals in the CBD declined by 8% during the quarter due to increasing vacancy in the sub market. Most of the companies are opting for suburban areas due to non availability of Grade A spaces in CBD. Rentals were stable at Ashram Road due to low vacancy and low transaction activity. Strata sales of office spaces continue to be the norm for most developments in the city; some projects have up to 60% of their space sold to end-users.
Bengaluru
Bengaluru witnessed an overall net absorption of 3.04 msf in 2013, a decline of 7% compared to the same period last year. The net absorption for Grade A spaces increased by 34% during the same period. Overall net absorption in Q3 was down 25% and stood at 1.2 msf. Around 95% of this net absorption was in Grade A developments hinting a clear preference for quality office spaces.
Net absorption comprised only 60% of the total leasing activity for All Grade spaces and 72% of the leasing activity for Grade A spaces. This indicated that even though the transactional activity increased by 48% and 90% respectively for All Grade and Grade A spaces, net effective space take-up in the city had reduced considerably and more businesses were relocating to comparatively cheaper but quality office spaces (indicated by increase in leasing activity of Grade A spaces).
Outer Ring Road (ORR) and Whitefield continued to be a preferred occupier destination due to connectivity with central and suburban locations coupled with growing residential catchments in these locations. Despite the overall sluggish transaction activity, Bengaluru still featured amongst the top three cities in terms of both leasing activity and net absorption indicating the importance of the city in Indian office sector dynamics.
The city witnessed an overall addition of 4.6 msf of office space in 2013, registering a decline of 22% compared to 2012. Nearly 91% of the supply during the year was Grade A space. The city witnessed an total influx of close to 1.5 msf (all of which was Grade A) during the third quarter down 9% from the previous quarter. Close to 40% of the total supply during the quarter was in IT-SEZ projects, all of it along ORR.
All Grade vacancy remained stable at 14.5%. Rental values remained in similar ranges across most submarkets with a quarter-on-quarter variation of merely 1-2% in their values. With increase in inquiries by companies overall sentiments remain optimistic. Transaction activity is anticipated to surge towards the end of the year along with the healthy supply levels. Rentals are expected to continue in a similar range in the upcoming quarter.
Chennai
Chennai witnessed overall net absorption of 2.27 msf for the first three quarters of 2013, a rise of 4% compared to the same period in 2012. It was amongst the two cities that noticed positive net absorption in year to date comparison. 85% of the total net absorption during the year was concentrated in Suburban Perungudi-Taramani.
All Grades net absorption decreased by 44% q-o-q in Q3 and was reported at approximately 767,000 sf. Chennai’s office markets witnessed the highest relocations amongst all the cities with Net Absorption for All Grade spaces amounting to only 25% of the total leasing activity in Q3 2013. For Grade A spaces, net absorption was 52% of the total leasing during the quarter.
Comparing net absorption numbers, the absorption for Grade A spaces in Q3 was nearly double that of All Grade spaces. The IT-ITeS sector continued to dominate leasing activity followed by the BFSI sector. Overall supply in the first three quarters of 2013 stood at 3.36 msf, an increase of 30% compared to the same period last year. Nearly 95% of this supply was contributed by Grade A spaces. Supply during the third quarter declined 75% to 600,000 sf.
With net absorption higher than supply, the overall vacancy levels in Chennai reduced by 0.4 percentage points over a quarter to 16.3% and vacancy levels for Grade A dipped by 1.8 percentage points to 18.1%, indicating a rise in popularity for such spaces. Weighted average rentals in CBD dipped due to an increase in vacancy caused by relocations.
Increase demand for office spaces in Suburban Perungudi-Taramani resulted in rental appreciation at the location during the quarter. Rentals in most other sub markets continued to remain stable during the quarter. Quoted rentals in locations like Suburban-Guindy and Suburban Perungudi-Taramani could increase in the coming quarters due to buoyant demand for spaces in these sub markets.
Hyderabad
Overall net absorption in Hyderabad for the first three quarters of 2013 declined by 23% to 1.54 msf compared to the same period in 2012. With low levels of pre commitments, net absorption for All Grade and Grade A spaces in the third quarter was recorded at 266,000 sf and 53,500 sf respectively witnessing the highest quarterly decline of 65% and 92% amongst the top eight cities. Hyderabad was the only market amongst top eight cities where the activity in Grade B and C spaces during Q3 overshadowed the Grade A spaces. This could mainly be attributed to low supply for Grade A space in the city.
This year saw infusion of only 0.63 msf of Grade A supply, majority of which was pre-committed. Grade A spaces contributed to only 20% share in the total leasing activity of approximately 0.27 msf witnessed during the quarter. Absorption during the year was concentrated primarily in suburban Madhapur and Gachibowli. Overall supply in 2013 also witnessed a decline by 33% in the first three quarters compared to 2012 and was noted at 1.64 msf.
Also, overall net absorption for the quarter contributed to just 31% of the total leasing activity during the period indicating the high quantum of relocations. All Grade supply during the third quarter was recorded at 632,000 sf, a decline of 34% compared to the previous quarter, whilst there was no Grade A supply.
All Grades vacancy was noted at 17.8% in Q3, an increase of 0.6 percentage points over the second quarter. With no new supply during the quarter and negligible transaction activity, vacancy levels for Grade A spaces in the city remained stable at 12.6%.
Rental values remained stable in most micro markets during the quarter. Upcoming supply is primarily concentrated in suburban areas of Gachibowli and Madhapur, which continue being favoured by occupiers. Rentals are expected to remain stable in all submarkets in the short term till economic condition improves and the political situation settles in the city.
Kolkata
Kolkata recorded an overall net absorption of 0.67 msf during the first three quarters of 2013, registering the highest decline of 41% as compared to the same period in 2012 amongst the top eight cities. Overall net absorption during the third quarter was nearly 179,000 sf, a decline of 43% compared to the second quarter.
Kolkata came second only to Ahmedabad it terms of the weakest transaction activity noted during the year and in Q3 2013. However, net absorption in the city contributed to almost 88% of the leasing activity during the quarter indicating stronger growth in the office leasing markets compared to the other cities. Also, Grade A spaces dominated the market activity in Kolkata. Transaction activity during the year was concentrated in the micromarkets of Rajarhat and Salt Lake.
All Grades supply for the first three quarters of 2013 was 1.26 msf, an increase of 22% compared to the same period in 2012. The city witnessed total supply of 205,000 sf of Grade A space during the quarter registering a significant drop over the previous quarter. Overall vacancy in the city increased marginally to 23.1% at the end of the third quarter.
Rentals at Rajarhat and Salt Lake declined marginally during the quarter due to high vacancy levels existing in the submarket despite the transaction activity. All Grade weighted average rentals in CBD micromarkets appreciated by 4% due to new developments quoting higher rentals than market average.
Rentals are expected to remain stable in most micro-markets in the coming months. However, rentals in Sector V Salt Lake are expected to continue to be under pressure due to existing high vacancy levels and anticipated infusion of good quantum of supply during the last quarter.
Mumbai
Overall net-absorption for the first three quarters of 2013 stood at approximately 3.6 msf, registering a decline of 28% compared to the same period in 2012. Despite the decline, Mumbai registered the highest net absorption amongst the top eight cities for both All Grade and Grade A spaces. Q3 numbers depicted an overall decline of 30% in net absorption to 1.1 msf.
Nearly 90% of this net absorption was in Grade A spaces. The quarterly activity depicted little or no relocations with net absorption falling in line with the leasing activity during Q3. Net absorption during the year was mostly concentrated in the submarkets of Thane-Belapur Road, Malad-Goregaon and Andheri-Kurla.
Overall supply during 2013 witnessed a decline of 55% compared to the same period in 2012. Overall supply during the quarter was 317,000 sf in the form of IT-ITeS development at Goregaon, a substantial decline compared to 2.2 msf of supply in the previous quarter. The low supply and decent transaction activity during Q3 resulted in Grade A vacancy declining to 20.2%, from 22.1% in the previous quarter.
The only submarket witnessing a rental change was Malad-Goregaon where Grade A rentals appreciated by 6% due to healthy demand and low vacancies in IT developments. Pre-commitment levels in the city witnessed a steady decline with high availabilities in most suburban and peripheral markets.
National Capital Region
NCR witnessed the highest decline of 41% and 55% respectively in net absorption of All Grade and Grade A spaces in the first three quarters of 2013. Q3 2013 overall net absorption witnessed a decline of 42% compared to the previous quarter and was noted at 0.38 msf as occupiers remained cautious towards expansion and new space take-up. Nearly 97.5% of this net absorption was contributed by Grade A spaces.
Besides IT-ITeS, the energy and engineering sectors also witnessed healthy leasing activity during the quarter, contributing significantly to the total absorption. Delhi’s CBD and Noida micro markets saw a few relocations within themselves during the third quarter. Net absorption during the year was concentrated majorly in Gurgaon CBD and other locations in Gurgaon.
Though the overall supply of 5.3 msf during 2013, registered an increase of approximately 16% in YTD comparisons, with quarterly supply amounting to 1.15 msf, there was a decline of 40% from the second quarter. Despite this decline, the NCR still was positioned amongst the top three cities in terms of quarterly supply.
Further, though leasing activity in Gurgaon’s CBD was strong, it still saw its overall vacancy rates increase by 4.0 percentage points over previous quarter due to a large supply infusion. Rentals in Delhi’s CBD declined by 3% during the quarter due to the sluggish demand for office space and comparatively higher rentals in this submarket.
With prevailing cautious demand sentiments and slowdown in supply, rentals across most micro-markets in NCR are likely to remain stable in the subsequent months of the year.
Pune
Pune witnessed an overall net absorption of 3 msf in 2013, an increase of 56% compared to the same period last year. The city witnessed the biggest quantum and the highest increase of 53% in quarterly incremental space take up with overall net absorption for the third quarter registered at 1.3 msf.
Net absorption for Grade A spaces increased by 70% q-o-q to 1.2 msf and contributed to nearly 94.5% of the total net absorption. Pune’s office markets also witnessed a decent churn of spaces with many occupiers opting for competitively priced offices in the same or nearby markets in the suburban and peripheral areas.
Net absorption during the quarter mainly was concentrated in areas like Yerawada, Shivaji Nagar, Nagar Road, Viman Nagar, Kharadi and Hinjewadi. The city also noted the highest supply of 2.28 msf during the quarter as compared to a total supply of 1msf in the first two quarters of the year. Around 95% of this new supply was in Grade A developments. The high supply infusion has resulted in overall vacancy increasing by 2.1 percentage points to 23.8% at the end of the quarter.
All Grades weighted average rentals in areas like Kalyani Nagar, Airport Road, Viman Nagar, Kharadi, etc. increased due to developers/investors quoting higher rentals than market average for the new supply. Rentals in areas like Hinjewadi and Wakad also appreciated due to increase in asking rates for existing stock. The Off-CBD – I market comprising areas like Karve Road, Deccan Gymkhana, FC Road, Jungli Maharaj Road, Ganeshkhind Road, SB Road, Wakdewadi was the only exception where weighted average rentals for Grade A vacant stock saw a decline as some prime office stock at the higher end of the rental range was absorbed and most of the existing vacant stock was available at lower rentals.
The healthy supply expected in the coming quarters will result in rise of vacancy levels. However, decent levels of transaction activity are expected to result in rentals remaining stable in the near future.
