Office Market Update: Q4 2023

Gross leasing in India’s top seven markets hit an all-time high of 20.94 mn sq ft in Q4, which proved to be the busiest quarter ever. Notably, the annual numbers crossed the 60 mn sq ft milestone for the very first time, reaching an impressive 62.98 mn sq ft, a significant 26.4% y-o-y increase. In a year marked by global headwinds, these achievements are a testament to the market’s strong underlying fundamentals and growth prospects. They also solidify India’s position and firmly establish its credentials as the ‘office to the world.’

Net absorption in Q4 2023 reached a historic high of 16.01 mn sq ft, topping the previous record of 14.09 mn sq ft observed in Q4 2019. While net absorption in the first half of the year was subdued, the pace of expansion from corporates quickened in the latter half of the year, reaching unprecedented heights in the final quarter. In fact, the net absorption in India’s top seven office markets breached the 40 mn sq ft mark and stood at 41.97 mn sq ft in 2023. This not only marks a new post-COVID milestone but also positions it as the second highest annual absorption, trailing only the levels recorded in 2019.

Space requirements remain intact as existing tenants plan headcount growth and space planning with return to office percentages continuing to ramp up. In addition, new entrants to the country, especially in the GCC and new tech sectors are expected to contribute positively towards new space demand. The year 2023 has set the platform for India’s office market to enter a phase of ‘accelerated growth’.

Key trends:

• Quarterly supply at a seven-quarter high: In the fourth quarter of 2023, new completions kept pace with leasing activity, reaching 18.75 mn sq ft. New completions during the quarter were headlined by Hyderabad which accounted for a 33.4% share, followed by Mumbai with a 17.8% share. Bengaluru and Chennai followed with 14.3% and 13.5% shares, respectively.
   

• Vacancy falls 10 bps q-o-q: Vacancy on a pan-India basis stands at 16.7%, a modest 10 bps decrease q-o-q. Core markets and superior quality institutional assets continue to find favour from occupiers resulting in significantly lower vacancy rates, usually in the single digits.
   

• Demand pie undergoing a transitional shift: The tech sector’s share decreased to 20.9% in 2023, its lowest in over a decade, with sluggishness in space take-up by third-party outsourcing firms, given global headwinds and slower revenue growth. In contrast, there has been increased traction from the manufacturing/industrial and BFSI sectors, particularly through the establishment of GCCs, with flex enjoying greater occupier acceptance as well.
   

• Bengaluru, Delhi NCR, and Hyderabad lead net absorption for 2023, Chennai has its best year ever: Bengaluru was the highest contributor to net absorption for the full year 2023 but saw a y-o-y flat performance. Delhi NCR saw its net absorption at a post-COVID high and second only to 2019 peak numbers. Hyderabad’s net absorption was slightly lower y-o-y but the city was still among the top three markets. Chennai had a record year with net absorption for 2023 reaching an all-time high. Mumbai, Pune, and Kolkata also saw their net absorption levels easily surpass 2019 numbers which remains the pan-India benchmark. On a Pan-India level, net absorption for 2023 stood at 41.97 mn sq ft, second only to the peak recorded in 2019.
   

• Hyderabad and Bengaluru combine for a 56.9% share of new completions in 2023: New completions stood at 53.64 mn sq ft, down by 7.9% y-o-y. Completions in 2023 were headlined by Hyderabad with a 28.7% share, followed by Bengaluru with 28.2%. Chennai and Delhi NCR also had respective shares of 11.2% and 10.3% in the annual completions for the year. These four accounted for a cumulative 78.4% share of the completions for 2023.
   

• Rents continue to strengthen across all major cities: On a q-o-q basis, rental growth was in the range of 0.2-2.3%, with Chennai, Mumbai and Kolkata witnessing maximum growth. Rents were only marginally up q-o-q in Bengaluru and Hyderabad