Office Market Update: Q2 2022

Gross leasing Volume (GLV) for Q2 2022 was recorded at 14.29 mn sq ft, up by 36% q-o-q and second only to Q4 2021 in the past 9 quarters. On a half-yearly comparison, GLV at 24.77 mn sq ft during H1 2022 was up nearly 2X y-o-y and over 80% of the H1 2019 numbers, signaling a steady yet sustained recovery in office market activity. An environment that was less uncertain and characterized by low volatility enabled occupiers to approach their real estate strategies with greater confidence. Bengaluru was top of the charts accounting for 34% of the quarterly GLV, followed by Delhi NCR (30%), Mumbai (12%) and Chennai (11%).

In Q2 2022, India’s top seven office markets combined to record a net absorption of 8.86 mn sq ft, which was lower by 23% q-o-q, marking the first decline in four quarters. The lower quarterly completions were a likely cause for the decrease in net absorption. On a half-yearly comparison, H1 2022 is higher than the corresponding period of both 2020 and 2021 and is 89% of the H1 2019 number. This indicates that growth and expansion plans for occupiers were back to a significant extent during the last few quarters.

Return to the workplace has started in the right earnest with office occupancy levels rising across most industry segments. The return, however, is still at varying speeds, though occupiers have their hybrid plans largely in place with the office playing the central role. The current quarter was indicative of the upbeat occupier sentiment with the visible improvement in leasing momentum. While there is greater certainty around business with the pandemic under check, with global headwinds swirling around rising inflationary pressures and slowing growth forecasts, occupiers are likely to remain cautiously optimistic moving forward. This may cause some sluggishness in leasing activity in the near-term as occupiers take stock of the evolving economic environment.

Key trends in office segment in Q2 2022

Lower completions in Q2, the likely cause of q-o-q decline in net absorption

The quarterly net absorption in Q2 was lower q-o-q, marking such an occurrence for the first time in five quarters. Also, market activity during the quarter was characterized by more relocation and consolidation activity while expansion-driven growth was slower.

Quarterly supply normalizes to 11.1 mn sq ft; down by 46% q-o-q

Q2 2022 witnessed normalization of supply with the completion of 11.1 mn sq ft during the quarter across the top seven cities. New completions were headlined by Hyderabad (42%), Bengaluru (39%) and Delhi NCR (13%). The office markets of Chennai, Pune and Kolkata saw no completions during the quarter, which also led to a q-o-q decrease in new supply.

Vacancy dropped marginally by 10 bps q-o-q

Though both completions and net absorption were lower on a q-o-q basis, the relatively higher decline in new supply infusion resulted in the pan-India vacancy dropping marginally by 10 bps q-o-q to 16.0%. While the headline vacancy may be a bit disconcerting, core office markets in the major cities continue to have tighter vacancies compared to the respective city’s overall numbers.

Tech dominates quarterly leasing accounting for one-third of market activity

The IT/ITeS segment saw its share rise to 33% from 25% q-o-q, clearly outlining its continued dominance as the most prominent occupier segment in India’s office sector. Manufacturing/industrial continues to show impressive gains with a 13% share of market activity backed by India’s policy push yielding results in this segment. BFSI and Consulting segments held shares of 10% and 8%, respectively.

Flex stays the course on its growth journey

Flex continues to make rapid strides as a major occupier segment with its mainstreaming among occupier space strategies resulting in a share of 20% in quarterly leasing activity. In fact, flex leased 2.8 mn sq ft in Q2 2022, the highest in 12 quarters and the H1 2022 numbers are already 30% higher than the annual flex space take-up for both 2020 and 2021 individually.

Rental values move up across all cities

On a q-o-q basis, rentals across the major office markets showed a strengthening trend with growth of 0.4%-2.1%.

Bigger deal sizes a mark of returning occupier confidence

Large deals (over 100,000 sq ft) accounted for the largest share in gross leasing activity for the second straight quarter, with the share rising to 42% from 31% q-o-q on an increasing base. Overall, deals more than 50,000 sq ft made up 57% of the quarterly leasing activity in Q2 2022.