Office Market Update: Q4 2021

Leasing activity picked up in the fourth quarter, and net absorption was 86% higher than the preceding quarter. However, year-on-year net absorption growth was a mere 2% as occupiers were cautious for some months after the second COVID-19 wave.

The year 2021 ended on a high note for commercial offices. In the last quarter, the net absorption hit an eight-quarter high (at 11.56 million sq ft) thanks to pre-commitments by occupiers.

The quarter also witnessed the highest gross leasing activity, or GLV, eight-month. At 15 million sq ft, GLVs reached pre-pandemic levels. The data indicate that occupiers approached real estate decision making with greater clarity towards the end of the year as infection rates remained low.

The year-on-year performance, however, was more stable. The net absorption marginally rose by 2% in 2021. The GLV, on the other hand, was 19.3% lower than the year earlier. The devastating second COVID-19 wave in early 2021 (starting March) led to a more measured approach towards real estate activity in the following months.

Trends in the commercial office segment

Here are some notable trends in vacancies, rental growth, supply and micro-markets.

Rentals showed marginal growth: In Q4, rentals increased slightly—0.1%-0.8% q-o-q—across key markets. Bengaluru and Pune recorded the maximum growth. On a year-on-year (y-o-y) basis, average office rentals in Hyderabad, Bengaluru and Pune increased by 2.6%, 1.9% and 1.2%, respectively. Otherwise, rents were largely stable in other cities.

New completions remained robust: New completions for 2021 were at 45.67 million sq ft, growing 23% y-o-y. New completions during the year signify that developers were confident of a strong leasing revival as business sentiments improved. Three top cities accounted for 72% of the new completions in 2021. Bengaluru's share was 33% of the overall new completions, Hyderabad accounted for 20%, and Delhi NCR and Mumbai followed with 19% and 17% shares, respectively. The last quarter saw the completion of projects with significant pre-commitments. A new supply of 9.12 million sq ft was completed in Q4 2021, down 16% q-o-q. However, over 60% that came on-stream in Q4 was already pre-committed, adding to the net absorption growth. Bengaluru, Hyderabad, and Pune headlined new completions.

Vacancy fell marginally: The demand surpassed new supply for the first time since the pandemic broke, leading to the vacancy dropping by 60 bps quarter-on-quarter (q-o-q). It fell from 15.9% in Q3 2021 to 15.3% in Q4 2021 on the back of good leasing activity.

Strong demand from flex operators and manufacturers: The fourth quarter saw healthy new leasing activity from sectors such as flex (co-working) and manufacturing firms, primarily due to transactions from prominent occupiers in these segments. Occupiers leased over 30,000 seats from flex operators across the top seven cities in Q4 2021, taking the total to 86,520 for the entire year—2.5 times the previous year. In 2020, flex operators had leased 35,000 seats. For 2021, flex and manufacturing followed IT and ITeS as the biggest office occupiers with 15% and 11% shares, respectively. We expect both sectors to remain significant contributors towards overall leasing activity.

IT and ITeS continue to drive demand: The IT and ITeS sector dominated the leasing activity in the fourth quarter (Q4) with a 42% share, increasing significantly from the previous quarter (18%). The sector remained the leading occupier for the entire year with a 39% share. India's offshoring and outsourcing story continues to gain traction among global corporates as they pursue digital transformation, leading to a rise in tech spending.

Three cities accounted for 64% of the net absorption: Bengaluru accounted for 30% of the overall net absorption in 2021, followed by Delhi NCR at 18%, and Hyderabad with a 16% share. Mumbai and Pune contributed 14% and 12%, respectively.

Occupiers focus on the future of work: With a better understanding of employee expectations, most firms have reworked their workplace strategies, many opting for the hybrid work model. Their real estate decisions were well-placed as they gained a deeper understanding of the future of work through the pandemic.

Landlords remained flexible: Developers and landlords don't prefer reducing the headline rent. However, they remained accommodative of occupiers' demands. Rents could remain rangebound as landlords continue to offer flexibility.

Outlook for office market in 2022

As we entered the new year, corporates had to delay their return to work plans due to the rise in the COVID-19 cases. They have been keeping a close eye on the events unfurling. Both occupiers and landlords are likely to continue cautiously and see how the market pans out.

Office space leasing is likely to remain healthy in the coming quarters. Net absorption for 2022 could reach around 32-35 mn sq ft, up by 25-30% y-o-y-like the pre-pandemic three-year (2016-2018) average.

A supply of 46-48 million sq ft is expected in 2022, of which 25-26% is pre-committed. The top developers are expected to contribute around 58% of this upcoming supply and have recorded pre-commitment rates of nearly 42-45%, signifying long-term occupier confidence and the importance of the physical workplace in their plans.