Office rentals crash in Delhi, Mumbai on excess supply

Office markets across the country continued to show a downward trend as most markets recorded negative growth in rental values after supply across eight major cities in India outstripped absorption by 45 per cent.

Mumbai, the financial capital of India, witnessed the sharpest decline in rental values in the first quarter of 2009 while the National Capital Region witnessed significant decline in rental values in central business district in the first quarter of 2009, according to Cushman & Wakefield’s latest office market report.

Micro markets of Mumbai including those of Lower Parel and Worli recorded drops of 37 per cent and 29 per cent respectively from a three per cent and 13 per cent drop respectively in the preceding three months. Rentals in central business district of Nariman Point fell by 13 per cent in the first quarter of this year compared to 20 per cent in the previous quarter.

Rentals in NCR’s CBD, mainly Connaught Place dropped by 17 per cent, the highest in the last 3 years, the property consultant said in the report.  The drop comes after a 14 per cent decline in the previous quarter. Bangalore rentals fell in the manageable range of three to seven per cent in key markets.

“The first quarter of the year can be termed as the weakest so far in terms of commercial office take up across major cities in India as compared to a similar period for the last 2/3 years,’’ said Kaustuv Roy, Executive Director, Cushman & Wakefield.
Bangalore witnessed the highest new office space supply of approximately 2.81 million square feet and also the highest demand of 1.29 million square feet. NCR and Mumbai witnessed fresh office space supply of 2.6 million square feet and 2.47 million square feet respectively and absorption of  0.8 square feet and 0.9 square feet respectively. Chennai, which had been reeling under over supply pressures saw moderate supply 0.98 square feet and absorption of 0.9 square feet.  Hyderabad and Ahmedabad saw no addition to the current stock.
 
Vacancy levels had remained largely consistent to last quarter with most IT/ITeS destinations witnessing high vacancy levels.
Chennai’s peripheral location (Rajiv Gandhi Salai) recorded the highest vacancy of approximately 42% while the city average was at approximately 18%. The lowest vacancy was recorded in Ahmedabad at five to six percent due to limited leasing activities and no new supply in the market.

Mumbai recorded a vacancy of approximately 11-12 per cent while vacancy levels in NCR stayed at a manageable 8 -10 per cent. Bangalore, Pune and Kolkata remained at an average of 16 -18 per cent. Hyderabad saw some slackness in activities and therefore recorded a reasonably high vacancy of 23% of which prime suburban region comprising of Banjara Hills and Jubilee Hills recorded a higher 35% vacancy.

''Re- negotiations and migration to more cost effective locations has been the norm for the cautiously advancing corporate sector. However going forward we are likely to see supply contraction,’’ said Roy.

''Acutely affected areas like IT/ITES and certain corporate office destinations will see deferment of projects to bridge the gap between supply and demand. While rental values are expected to be under pressure in short to medium term, going forward lower rentals are likely to have a more positive impact on the absorption numbers,’’ he added.