Office rents up 7% in top 7 cities despite tepid leasing in H1FY24: Anarock

Notwithstanding tepid leasing activity in the first half (H1) of 2023-24 (FY24), average rental values across the top seven cities witnessed a 7 per cent growth in H1FY24 compared to the same period in 2022-23 (FY23), essentially due to increased construction and input costs, according to Anarock Research.

The data indicates that Grade A office rental values averaged at Rs 83 per square foot per month across the top seven cities in H1FY24, while in the corresponding period in FY23, it was about Rs 77.5 per square foot per month.

The top seven cities covered by Anarock are Bengaluru, Mumbai Metropolitan Region (MMR), Delhi-National Capital Region (NCR), Chennai, Hyderabad, Pune, and Kolkata.

Chennai saw the highest 10 per cent yearly increase in average office rental value, followed by Hyderabad with an 8 per cent yearly growth.

Bengaluru, Pune, and Kolkata saw 7 per cent annual growth each. Realty hotspots MMR and NCR registered a 5 per cent jump in rental values.

The average monthly office rental value in Bengaluru stood at Rs 90 per square foot in H1FY24, against Rs 84 per square foot in H1FY23. In Pune, the average office rental value stood at Rs 74 per square foot in H1FY23 while in H1FY24, it was Rs 79 per square foot.

Kolkata saw a yearly rise in average monthly office rental value in H1FY24, reaching Rs 58 per square foot compared to 54 per square foot in H1FY23. The city currently has the most economical office rental values among the top seven cities.

MMR, the most expensive office market in the country, saw a monthly average office rental value jump from Rs 130 per square foot in H1FY23 to Rs 136 per square foot in H1FY24.

In Delhi-NCR, the average office rental value stood at Rs 81 per square foot in H1FY23 from Rs 85 per square foot in H1FY24.

“It was widely anticipated that commercial office space demand in India will see a downturn amid layoffs by several large corporates worldwide and shrinking business volumes,” said Prashant Thakur, regional director and head of research, Anarock Group.

In terms of sector-wise net absorption, information technology (IT)/IT-enabled services (ITeS) continues to dominate leasing transactions in H1FY24. However, the sector’s overall share in leasing has been on a decline year-on-year (Y-o-Y).

In H1 of 2019-20 (FY20), the share of the IT/ITeS sector in overall leasing was a whopping 46 per cent, while in H1FY24, its share dropped to just 29 per cent.
 

Small-ticket leasing (below 50,000 square feet) dominates office leasing activity with a 53 per cent share across the top seven cities.

Consequently, the share of co-working spaces has been on the rise from 11 per cent in H1FY20 to 24 per cent in H1FY24. This denotes a shift in the leasing trend by many corporates of various sizes who now see flexible workspaces as a viable and more cost-effective option. The office market share of co-working spaces increased in H1FY24, with Bengaluru’s share increasing from 23 per cent in H1FY23 to a remarkable 32 per cent in H1FY24.

“The IT/ITeS sectors have always been the torchbearers in the Indian office market space, but the global slowdown this year has had an impact on their leasing share, especially since many large multinationals in the US and other markets announced layoffs. Given that India cannot be decoupled from the Western economies, the leasing activity here remained tepid,” said Thakur.

“However, rather than demand from Indian IT/ITeS companies slipping completely, trends indicate the changing patterns of leasing activity by several of these corporates. Many are seen opting for co-working spaces for various reasons, including cost-effectiveness and flexibility,” Thakur added.

The report stated that amid increased office space completions, vacancy levels across most top cities rose marginally except in NCR, MMR, and Kolkata. The average vacancy rate of Grade A offices in the top seven cities collectively increased by 0.95 per cent, from 15.9 per cent in H1FY23 to 16.85 per cent in H1FY24.

An analysis of annual variations in average vacancy rates across the top seven office markets shows that Pune currently has the lowest at 8.3 per cent. NCR, MMR, and Kolkata witnessed a Y-o-Y reduction in vacancy levels with 0.8 per cent, 0.45 per cent, and 0.1 per cent, respectively. Chennai maintained equilibrium in its vacancy rates throughout the period.

Anarock believes that the mid-to-long-term outlook remains positive, considering that Grade A offices are still available at “sub-dollar rents”. Stability in the office market may return in the second half of 2024.