Office space demand remains resilient: Knight Frank India

Hyderabad: The office space demand was resilient with a growth of 3 per cent YoY growth in terms of volume at 26.1 million sq ft transacted across eight major cities in India during H1 (January-June) 2023, says real estate consultant Knight Frank India in its latest report. The office market saw robust activities during H1 2023 on the back of the undercurrent of economic stability.

The growth is also reflected in the relatively stable occupier activity seen in the Indian office market. In fact, the momentum seemed to be increasing toward the end of the period as 14.8 million sq ft was transacted in Q2 2023, the highest quarterly tally since Q1 2021. Office space vacancy has reduced in most markets. The demand for flex spaces is at a new record high.

Over the past four half-yearly periods, transaction volumes in a tight band of 25-26 million sq ft showcase the resilience of the office market in the backdrop of a turbulent economic and geopolitical environment across the globe. Also, the market was not impaired by the remote work due to the greater influence that employers have in India and their willingness to adopt flexible working.

Transaction volumes in Chennai and NCR grew at 104 per cent and 24 per cent YoY respectively during H1 2023. Bengaluru with 7 million sq ft, constituted 27 per cent of the area transacted. NCR with 5.1 million sq ft is a distant second whereas Chennai and Mumbai with 4.5 million sq ft and 3.2 million sq ft took the third and fourth spots respectively.

Shishir Baijal, Chairman and Managing Director, of Knight Frank India, said, “While many office markets around the world struggled with the adverse effects of an economic slowdown, India’s office market displayed remarkable resilience. The segment exhibited consistent growth numbers, standing out from the rest as the Indian office market was less affected by the remote working phenomenon.”

He further said, “This can be attributed to the proactive approach of employers, who readily embraced flexible working options to address the concerns. The strengthening economic fundamentals provide a solid foundation for the office market especially to the growth of India facing businesses which are expected to sustain demand throughout 2023.”

India-facing businesses have been gaining traction in recent times as growth capital is increasingly finding its way into the country, due to the relatively favourable economic environment here. The office space amounted to 35 per cent, flex spaces accounted for 26 per cent, global capability centres at 25 per cent, and third-party IT services at 14 per cent out of the total volume transacted in H1 2023.

Third party IT services have come down largely due to hybrid and budget cuts by the clients. Other service sector companies such as those from the healthcare, education, and e-commerce segments constituted approximately 49 per cent of these India-facing businesses while BFSI and manufacturing companies accounted for 28 per cent and 13 per cent of the same.

The demand for flex spaces which has been rising consistently over the past few years has only received an added boost by the pandemic. The share of flex spaces has scaled a new high of 26 per cent in H1 2023 and depicts the accelerated growth vector that this segment has firmly embarked on. While office space demand has remained extremely resilient, the supply dropped 25 per cent YoY in H1 2023.

The comparatively lower 18 million sq ft delivered during the period has pulled down vacancy from 17 per cent in H1 2022 to the 16.4 per cent currently. The lower volume of office completions has thus helped the market maintain a healthy equilibrium in the backdrop of global headwinds that pose a challenge. Bengaluru and NCR accounted for 57 per cent of the total space delivered during H1 2023.

Rental values were stable or strengthened across all markets in H1 2023. While rents have grown in the range of 1 per cent to 3 per cent for most markets, rents in Kolkata have grown by 10 per cent YoY due to very little supply coming up since the pandemic hit in H1 2020. This year has begun on a good note for the office market, and the improving physical occupancy levels observed across the eight markets.