Office space net absorption expected to reach pre-pandemic levels: experts

While tier-1 remains the key demand driver, there is considerable interest in tier-2 cities due to improved infra and the prevalence of hybrid working model

With the adoption of hybrid working models and companies mandating work from the office, the demand for office spaces has increased not only in tier-1 cities in tier-2 as well.

According to experts, the net absorption for office space this year is expected to surpass the pre-pandemic average and cross the 40 million-sq-ft mark.

Experts say the recovery from the pandemic indicates significant movement towards pre-pandemic absorption levels, which can be attributed to sustained economic growth and government focus.

Pre- and post-pandemic demand

According to a CBRE report, office space absorption has risen by nearly 66 per cent annually.

“Net absorption of office space was 35-40 million sq ft before the pandemic, with 2019 being an exceptional year, with 47 million sq ft net absorption,” said Karan Bolaria, managing director & CEO, Godrej Fund Management.

Bolaria said that during the pandemic years of 2020-21, the absorption dipped by about 25 per cent to 25-30 million sq ft per year.

According to a JLL report, “Gross leasing Volume (GLV) for the second quarter (Q2) of 2022 was recorded at 14.29 million sq ft, up 36 per cent QoQ and second only to Q4 2021 in the past nine quarters.

“On a half-yearly comparison, the first half of 2022 is higher than the corresponding period of both 2020 and 2021 and is 89 per cent of the first half of 2019,” said Harsh V  Bansal, Co-Founder, Unity Group

Tier-1 vs tier-2 demand

Due to hybrid models and proper intrusion of technology in suburbs, demand for office spaces in tier-2 cities is also rising, though Tier-1 cities have always been driving demand.

“The growing demand for office space in Tier-2 cities is primarily due to the improving real estate landscape, a better work environment with access to skilled talent, increased investor interest, better quality of life with improving social infrastructure, and an increased focus on sustainability aspects,” said Anshuman Magazine, Chairman & CEO-India, South-East Asia, Middle East & Africa, CBRE.

He added that over 85-90 per cent of the current office demand is still from the key Tier-I cities. However, several prominent developers such as DLF, Godrej Properties, Mahindra Lifespaces, Brigade, Prestige, Embassy, and L&T have expanded their real estate portfolio into tier-2 cities as well.

This is mainly to cater to the rising demand from global and domestic players in these markets, Magazine said.

Bolaria said though the maximum demand is still coming from tier-1 cities, tier-2 cities have witnessed spillover demand as employee reverse migration during the pandemic has led to large establishments considering smaller presence and operations in Tier II cities.  

Expressing his views on demand from tier 2 cities, Bansal said, “the ratio of Tier-1 cities is still higher. However, tier-2 cities are also coming up not as competition to Tier-I cities but as co-drivers of the overall economic activity in the country.”

Sectoral demand

According to CBRE data, the technology firms, flexible space operators, and BFSI companies led the space take-up, together accounting for more than two-thirds of the overall leasing in the third quarter of 2022.

Among the sectors, the technology sector would continue to drive leasing activity. Leasing by sectors such as BFSI, flexible spaces, engineering & manufacturing, and life sciences is also anticipated to grow annually.

“Since the pandemic and even before it, the IT and ITeS sectors are the main drivers of leasing activity, and their expansion will increase demand for high-quality office spaces,” said Bansal.

He added that the restoration of economic activity, a hiring frenzy in various sectors/industries, and increased investor interest in Grade A commercial real estate assets all point to a positive growth outlook.  

Magazine said that in the quarters ahead, the supply pipeline is expected to remain robust as high-quality, investment-grade projects by leading developers and institutional owners in prime locations would continue to draw flight-to-quality space take-up.