Office Market Update: Q2 2023

Gross leasing activity across the top seven cities of India was recorded at 12.7 mn sq ft in Q2 2023, building on the market traction sustained from the previous quarter and signalling the resilience in India’s office sector. On an H1 comparison basis, gross leasing was also up by 2.5%, showing India’s office markets being clearly insulated from the global headwinds’ impact.

Net absorption is up 4% q-o-q but is typified by occupiers remaining slightly bearish on big expansion plans given the still swirling global headwinds of economic uncertainty. India’s net absorption across the top seven cities broke its declining trend to be at a three-quarter high. While occupiers do remain slightly bearish on expansion activity, India continues to see growth from its domestic firms and global occupiers spreading their wings, albeit at a slightly slower pace.

Space requirements have now stabilized and are showing signs of recovery with deal closures being rolled over and replaced by new requirements keeping the demand pie intact. While the global headwinds and the tech sluggishness would still be limiting factors to consider, India’s resilience in the past six months is expected to sustain over the remainder of the year as well. Transaction closures will be relevant to the forecasts for 2023 with any slippages likely to keep 2023 slightly muted but positively impact the years beyond.

Key trends in office segment in Q2 2023

Net absorption recovers to 7.95 mn sq ft; highest in three quarters

The quarterly net absorption in Q2 2023, rose to a three-quarter high of 7.95 mn sq ft. While an evolving hybrid workplace strategy and global economic scenario have kept occupiers more cautious, prior pre-commitments have been honoured even as consolidation/ relocation activity remains a dominant theme. Bengaluru retook the top spot in the quarterly net absorption and was followed by Chennai which jumped to the second spot with its quarterly net absorption rising to a 15-year high.

Quarterly supply at 10.5 mn sq ft; up by 5.3% q-o-q

Hyderabad dominated with a 47.2% share of new completions, followed by Bengaluru with a 22% share. With Chennai accounting for a 12.7% share, the three south and tech gateway cities accounted for an 81.9% share of quarterly new completions. In the quarterly supply infusion, the precommitment rate was at 23%, signalling the somewhat bearish state of occupiers’ future planning considering the uncertainty in the current global business environment.

Tech continues to lead quarterly occupier activity; flex consolidates its growth and is in the second spot

Tech remains slightly sluggish but still led in terms of the overall share of the quarterly leasing activity with 23.1%, better than its lowest post-pandemic, six-quarter low share seen in the previous quarter. Flex is now firmly entrenched in the second spot and accounted for a 17.7% share, nearly similar to the last quarter. The strong growth currents driven by managed operators and sizeable enterprise demand remain intact for the flex segment. BFSI was also quite active with a 16.9% share of the quarterly gross leasing in Q2.

Rental growth endures across all major cities

On a q-o-q basis, rents rose across all cities, without exception, in the range of 0.3-1.2% q-o-q. Bengaluru, Pune and Kolkata recorded the highest rental growth. On a y-o-y basis, average office rents in Bengaluru and Kolkata rose by 2.7% and 2.6%, respectively. Delhi NCR and Pune saw rents up by 2.4% y-o-y across both, with Mumbai recording rental growth of 1.7%, Chennai 1.4% and Hyderabad 1.3% over the same period.