COMMERCIAL SPACE DEMAND ACCELERATES TO AN ALL-TIME HIGH OF 48 MSF: CUSHMAN & WAKEFIELD INDIA

  • Bengaluru and Hyderabad lead in activity
  • Gross absorption grew to its highest ever during the year to 48.1 msf, in line with Cushman & Wakefield’s prediction last year
  • Co-working clocks nearly 5mn sf of space take-up breaking all previous records
COMMERCIAL SPACE DEMAND ACCELERATES TO AN ALL-TIME HIGH OF 48 MSF: CUSHMAN & WAKEFIELD INDIA

National, 14th January 2019: Strong macro-economic environment, and a robust business support ecosystem has propelled 2018 to be the best year in terms of office sector demand with gross leasing activity ending at 48.1 mn sf for the year. The year also saw a record high preleasing activity making a strong case for the country’s continued growth momentum as firms plan while indicating the robustness in growth of supply and absorption in the coming couple of years.

Quality supply continues to draw in occupiers who are willing to pre-commit especially in cities like Bengaluru, Hyderabad and Pune where vacancies continue to remain tight and in single digits.

THE PRE-LEASING STORY GATHERS MOMENTUM

During 2018, a record 15.6 mn sf of space was preleased, a strong 31% y-o-y growth. Bengaluru saw pre-commitments of 5.5 msf, garnering 36% share of the total. This was followed by Hyderabad with a 32% share, reflecting lack of immediate ready space due to limited vacancy in both cities. Pune with its ultra-tight vacancy also recorded pre-commitments to the tune of 3.3 msf.

Finding adequate space options in single-digit vacancy cities (Bengaluru, Chennai, Hyderabad, Pune) is proving to be a challenge and many firms are aligning their space requirement plans to pre-lease future space. We are seeing trends of increased competition even in older buildings in tech parks even as developers look to upgrade such buildings in term of physical aspects as well as amenities.  Many firms are also keen to open the option of moving into managed spaces of co-working operators who are transforming themselves in terms of their business dynamics.

Cities like Bengaluru, Pune, Hyderabad and Chennai continue to witness single digit vacancies, leading to faster rental growth in key office markets. Hot office markets like ORR (Bengaluru) and Madhapur (Hyderabad) where vacancies are ultra-tight (<5%) have registered a rental growth of 13-18% on an annual basis. Similar is the case with Pune SBD – East (Kharadi, Viman Nagar and Hadapsar) where rentals have escalated by 8% during the year. In Chennai on the other hand, peripheral locations have witnessed a 10-14% rental growth (y-o-y) driven by a demand spill over from tighter suburban markets.

GROSS ABSORPTION AT RECORD HIGH

Gross absorption grew to its highest ever during the year to 48.1 msf, in line with Cushman & Wakefield’s prediction last year where we predicted total demand in the range of 48-50 msf. This strong growth demand is led by expansionary activity by occupiers in the technology and IT-BPM space, ramp-up by co-working players and investments of companies in global capability centres.

GROSS ABSORPTION

As has been the trend, Bengaluru’s position remains unparalleled with a share of 32%. Hyderabad, which witnessed its highest leasing activity ever (holding a 21% share), is seeing demand rising at a frenetic pace, with no signs of slowing till at least 2020. Delhi-NCR made an emphatic comeback during the year, with gross absorption rising 30% to 9.2 msf.

Net absorption, or incremental new space take-up too has seen a healthy 12% jump to 29 msf, across the top eight cities, led by strong expansion plans by occupiers, as well as entry of MNCs into newer geographies amidst sturdy business confidence. The surge in net absorption displays huge confidence in the market, undeterred by the impending elections this year.

DEMAND WELL ABSORBED BY STRONG SUPPLY OF 34 MSF

  • The surge in demand was well absorbed by the quality supply that came into the market in 2018. Developers completed several projects prior to the general elections this year, as there could be delays in attaining approvals during the election period.
  • Supply rose 34% y-o-y to 34 msf during the year, with Bengaluru accounting for the largest share at 27%.
  • Mumbai emerged as a surprise front runner with a 19% share in supply at 6.4 msf

SUPPLY

2017 (msf)

2018 (msf)

% Chg

Ahmedabad

               0.4

1.7

337%

Bengaluru

           6.5

9.2

41%

Chennai

           2.7

2.8

5%

Delhi-NCR

           2.5

4.3

73%

Hyderabad

           5.5

5.5

-2%

Kolkata

           2.7

0.6

-77%

Mumbai

           3.4

6.5

91%

Pune

           1.4

3.2

118%

         25.3

33.9

34%

LARGE DEALS CONTINUE TO GARNER ATTENTION

  • This rapid expansionary activity by occupiers has led to the resurgence of large deals (above 100,000 sf) in the market whose tally was noted at approximately 111 deals.  
  • Total space leased through large deals rose 31% y-o-y to 27 msf during the year, in a sign that occupiers have increased assurance in their business and growth with India continuing to figure prominently in their expansion plans.
  • Large deals accounted for 57% of the total Grade A leasing during the year, from almost 50% share in 2017.
  • Being the tech capital and home to prominent start-up unicorns as well as the hub of new technology and R&D firms, Bengaluru accounted for almost 42% of the large deals. This was spurred by space take-up by occupiers in sectors such as BFSI and Engineering sectors for their captive centres.
  • Hyderabad, which had a share of 22% in total large deals, witnessed large deals by IT-BPM and captive centers.

IT-BPM & Tech driving demand; Leasing up 12%

  • IT-BPM sector continued to be the largest demand driver with a share of 33% in leasing activity.
  • On an absolute basis, leasing by IT-BPM and tech companies rose 12% to 16.5 msf during the year
  • Global spending on technology and outsourcing is also showing signs of rebound with the growth rate being the highest since 2007.
  • Almost 31% of the total space leased through large deals was accounted by the IT-BPM sector
  • There are multiple outsourcing contracts which are up for renewal by Indian firms, worth around USD 51 billion.

Large office space in demand by Captive Centers

  • Captive Centres accounted for 26% of the total leasing during the year, as India emerges as a hub for Global in-house centres/Capability centres mainly from the North American and European markets
  • In the total space leased by large deals, captive centers accounted for a whopping 41%
  • India’s strong demographic and its competitive costs continue to be an attraction for occupiers, with an increasing number of firms look to set up their global capability centres out of India.
  • Majority of the space for captive centers was leased by the BFSI sector as financial services firms insource back-office operations, Innovation and R&D in-house for better quality control

Leasing by co-working players at record high

  • Flexible workplace companies, that includes co-working and business centers, raked up the highest ever leasing this year at 4.9 msf
  • Flexible workplace companies are aligning themselves to target large enterprises and are transforming into managed space operators where they are willing to offer the entire centre to a single tenant who in turn is looking for quality space which comes with its own trimmings of flexibility, cost savings and a cool workplace environment. This is leading to a larger uptake of space by such companies. During the year, the sector accounted for almost 10% of total large deals in 2018. Some example of occupiers in managed space include Advanced Micro Devices, Westbridge Capital, Rakuten etc.
  • The emergence of enterprise space take-up in co-working/flex is a huge affirmation of firms’ strategy of mixed portfolio of fixed and flex space going forward.
  • Anshul Jain, Country Head & Managing Director, Cushman & Wakefield India India’s office market hits an all-time high with leasing activity scaling 48 msf, as forecasted by us earlier during 2018. It signals the strength and resilience of the commercial markets as well as the continued positive business momentum that carried us through the year. Nearly 30% of gross leasing volumes came in the form of preleasing activity which bodes well for the continued confidence in the country’s economic might and growth prospects. Vacancy rates in core office corridors is expected to be tight in major cities such as Bengaluru, Hyderabad and Pune, with substantial supply in 2019 pre-committed already.

    Flex operators shall likely grow at an even faster pace next year with Hyderabad, Pune and Chennai as their next cities of growth, especially among the large players who have grown tremendously in Bengaluru, NCR and Mumbai over the past couple of years. That said, the latter three shall continue to see heightened activity from co-working players in the next year as well.  

About Cushman & Wakefield

Cushman & Wakefield (NYSE: CWK) is a leading global real estate services firm that delivers exceptional value for real estate occupiers and owners. Cushman & Wakefield is among the largest real estate services firms with 48,000 employees in approximately 400 offices and 70 countries. In 2017, the firm had revenue of $6.9 billion across core services of property, facilities and project management, leasing, capital markets, valuation and other services. To learn more, visit www.cushmanwakefield.com or follow @CushWake on Twitter.