Global slowdown blues will stall demand for office space this year: Crisil

IT firms and Global Capability Centres (GCCs) of multinational corporations are expected to keep demand modest in the near term amid global economic headwinds

IT service firms, workplace, office space, commercial, rent, employees, staff, women

BS Web Team New Delhi

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The demand for commercial office space is expected to stagnate this fiscal year at 32-34 million square feet (msf) amid global uncertainties, according to Crisil rating. 

IT firms and Global Capability Centres (GCCs) of multinational corporations, the two most dominant players in India’s commercial office space, are expected to keep "demand modest in the near term amid global economic headwinds," said Crisil.

IT companies and GCCs are the main factors in the slowdown

Information technology (IT) and IT-enabled services (ITeS) companies occupy 42-45 per cent of the operational stock. Global Capability Centres (GCCs) of multinational corporations have also emerged as key tenants in the past few years, occupying around a third of the total stock.

" Headcount addition in the Indian IT/ITeS sector has already come to a halt amid tapering revenue growth and pressure on profitability. Plus, the sector may look to control costs, including rent. Two, GCCs may defer large-scale leasing plans in India amid the weak macroeconomic outlook in key regions such as the US and Europe,” said Gautam Shahi, Director, Crisil rating. 

But net leasing is expected to grow 10-12% next fiscal to 36-38 million square feet
According to Saina Kathawala, Associate Director, Crisil Ratings, notwithstanding the near-term hiccups, net leasing is expected to grow 10-12 per cent in the next fiscal year to 36-38 msf. Net leasing refers to absorption of new office space less space vacated by tenants.

The trend in net leasing data by CRISIL shows that absorption of new office space declined to as low as 21 msf in the fiscal year 2021. However, in the last two fiscal years, it has picked up substantially, reaching 27 msf in FY22 and 33 msf in FY23.

The following chart represents Grade-A office space with an operational stock of around 705 msf as of March 2023 for seven major cities — Bengaluru, Chennai, Hyderabad, Kolkata, Mumbai Metropolitan Region (MMR), National Capital Region (NCR) and Pune.

CRISIL Ratings

Indian cities provide highly competitive rental rates 

 Average rentals in Mumbai Metropolitan Region, Bengaluru, and National Capital Region Delhi are Rs 130, Rs 90, and Rs 80 per square foot, respectively, way below Asian peers such as Shanghai (Rs 310), Seoul (Rs 230), and Manila (Rs 150). It is also significantly lower than global metro cities such as Singapore (Rs 640), Hong Kong (Rs 570), Tokyo (Rs 500), Sydney (Rs 390), London (Rs 610), and New York (Rs 560), shows data analysed by Crisil.

“Growth is expected to remain at a similar level over the medium term as well, supported by both GCCs and domestic enterprises. GCCs are expected to drive office demand, given the cost advantages of the Indian market vis-à-vis other developing markets as well as the availability of a skilled talent pool,” said Kathawala.

Employers pushing for increased physical occupancy in offices may prove to be another tailwind for office leasing. Most companies — including those in technology, which otherwise were favouring work-from-home — are now pushing for return to office on most days of the week. Physical occupancy, which averaged 40% last fiscal, is expected at 65-70% this fiscal, noted Crisil. 

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First Published: Nov 20 2023 | 1:20 PM IST

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