Office rentals to rise 4-5% despite slowdown, higher supply

The cost of leasing offices in India is set to increase by 4-5% in the next three years despite the economic slowdown and supply of office spaces rising faster at 16%.

According to a report by Colliers International India, even though the office space absorption at 28.9 million square feet saw a marginal 1% year-on-year fall during January-September 2017, the demand will soar in future.

"Leasing momentum to pick up in Q4 2017 and we maintain our forecast of over 40 million square feet for 2017," reads the report.

Surabhi Arora, senior associate director, research, Colliers International India, said in a statement, "Despite the temporary slowdown in the economy in the aftermath of several major government reforms executed in 2017, office market remained upbeat with increased investor activity, sustained leasing demand from technology companies and growing leasing interest from various industry occupiers like manufacturing, co-working, logistics and warehousing. Rents are likely to see an upward growth trajectory especially in Grade A buildings with an average annual increase of 4-5% over the next three years across Indian cities."

On the supply side, around 90 million sq ft is under various stages of construction, which is likely to increase the total stock by 16% in the next three years.

At present, Bengaluru leads the demand for office spaces with a 31% share, followed by National Capital Region at 25%, Hyderabad and Chennai at 12% each, Mumbai (10%), Pune (8%) and Kolkata (2%). In terms of sectors, technology companies had maximum demand with 39% of total absorption, followed by banking, financial services and insurance sector at 17%.

"Overall, the commercial market will remain stable despite the economic slowdown," said Ritesh Sachdev, senior executive director, occupier services, Colliers International India, in a media release.

The rise in demand for co-working spaces, led by rising rentals, is another factor driving the market for office spaces. "With an 8% share of total leasing volume in Q3 2017, co-working operators are making their presence felt in the market," added Sachdev.

As per a recent joint research by JLL India-WeWork, co-working spaces in India are expected to receive $400 million in investments by 2018 and set to grow 40-50% to reach over 1 million sq ft.

"With office rental costs continuing to rise across India's business districts, the total space leased by co-working operators in the top cities could potentially stand at 7–9 million sq ft by 2020. This presents a huge opportunity in the commercial office space. Co-working spaces can lead to a 20-25% cost savings as opposed to working in the traditional office spaces," said Ramesh Nair, chief executive officer and country head, JLL India.

Possibly, this is among the primary factors for co-working operators making their presence felt in the market and also gaining ground.