Office market net absorption up

                                Office market net absorption up 32%
                                    in second quarter of 2021: JLL 

·         Net absorption in top seven markets at approximately 4.4 million sq. ft in Q2 2021

·         Bengaluru and Pune accounted for nearly 60% of net absorption during H1, 2021

·         New completions in Q2 2021 were recorded at 11.67 million sq. ft

·         Vacancy levels in top seven markets rose to nearly 16% at the end of Q2, 2021

India’s net office absorption stood at 4.39 million sq. ft in the second quarter, representing 32% year-on-year growth in major cities, according to JLL’s Office Market Update-Q2, 2021. Given the strict nationwide lockdowns across the country in the second quarter, net absorption dipped by 16% versus the previous quarter. However, the quarter-on-quarter drop was lower than the 61% during the same period last year when the first wave of the pandemic hit, showing the market’s improved resilience.  

Office absorption was more resilient during the second wave

City	Q1 2020 (mn sq. ft)	Q2 2020 (mn sq. ft)	Growth (%) Q2 2020 over Q1 2020	Q1 2021 (mn sq. ft)	Q2 2021 (mn sq. ft)	Growth (%) Q2 2021 over Q1 2021
Bengaluru	2.71	0.45	-83%	2.22	2.34	5%
Chennai	0.92	0.10	-90%	0.37	0.11	-70%
Delhi NCR	1.55	0.50	-68%	1.07	0.61	-43%
Hyderabad	0.92	1.18	29%	0.79	Negligible	-
Kolkata	0.02	Negligible	-	0.04	0.02	-60%
Mumbai	2.14	0.45	-79%	0.24	0.61	149%
Pune	0.36	0.64	77%	0.50	0.71	43%
Total	8.62	3.33	-61%	5.23	4.39	-16%

Source: Real Estate Intelligence Service (REIS), JLL Research

 

The focus was on undertaking measures such as vaccination drives for employees to ensure that they eventually come back to the office is safe and sustainable.

The overall market witnessed a net absorption of 9.63 million sq. ft in H1 2021, a decrease of 19% when compared to H1 2020. Markets of Bengaluru and Pune accounted for nearly 60% of the net absorption during H1 2021. Moreover, these two markets along with Kolkata were the only ones which witnessed a growth in net absorption in H1 2021 when compared to H1 2020.

Net absorption dipped by 19% in H1 2021

City	H1 2020 (mn sq. ft)	H1 2021 (mn sq. ft)	Growth (%)
Bengaluru	3.16	4.55	44%
Chennai	1.02	0.48	-53%
Delhi NCR	2.05	1.69	-18%
Hyderabad	2.11	0.79	-62%
Kolkata	0.02	0.06	270%
Mumbai	2.59	0.85	-67%
Pune	1.01	1.21	20%
Total	11.94	9.63	-19%

Source: Real Estate Intelligence Service (REIS), JLL Research

 “It is important to note that pre-leasing commitments have been largely intact and there has been limited downsizing activities by larger corporates. Corporate occupiers are holding on to office spaces with the belief that as vaccination drives accelerate, occupancy at offices will start to improve. Furthermore, completions during H1 2021 were recorded at 25.11 million sq. ft, an increase of 75% year-on-year, show that developers are confident of a strong revival in office leasing activity once business as usual is reinstated. In the second half of the year,  if the country can ensure that most of the active workforce gets fully vaccinated, the shift back to office premises will be more feasible and sustainable,” said Rahul Arora Head of Office Leasing Advisory, JLL India.

New completions in Q2 2021 were recorded at 11.67 million sq. ft., more than double than that of Q2 2020. With the addition of nearly 12 million sq ft of space, the Grade A office stock in the top seven cities under consideration crossed 650 million sq ft.  During the first wave of COVID-19, new completions took a hit due to the unavailability of labour. The robust new completion level in Q2 2021 is indicative of the fact that construction activity was not impacted significantly during the second wave.

New completions at robust levels despite the second wave

City	Q1 2020 (mn sq. ft)	Q2 2020 (mn sq. ft)	Growth (%) Q1 2021 over Q4 2020	Q1 2021 (mn sq. ft)	Q2 2021 (mn sq. ft)	Growth (%) Q1 2021 over Q4 2020
Bengaluru	3.35	-	-	4.33	5.19	20%
Chennai	0.53	-	-	-	0.50	-
Delhi NCR	1.94	1.94	0%	4.01	1.22	-70%
Hyderabad	1.35	2.38	77%	2.20	1.64	-25%
Kolkata	-	-	-	-	-	-
Mumbai	0.84	1.45	73%	2.18	2.54	16%
Pune	0.60	-	-	0.70	0.58	-17%
Total	8.61	5.77	-33%	13.43	11.67	-13%

Source: Real Estate Intelligence Service (REIS), JLL Research

 “Compared to the big dip that we had seen in the Q2 2020 due to the first wave, the market showed more resilience in Q2 2021 when hit by the second wave. The strength displayed by the office market in India since the pandemic owes much to the fact that the IT/ITeS sector has been largely unaffected by the economic downturn. IT/ITeS occupiers continued to account for a majority of the office leasing activity in 2020 at around 50%. In 2021, we expect the IT/ITeS sector to remain the key occupier group while demand from emerging sectors such as e-commerce, manufacturing and healthcare is likely to increase further,” said Dr. Samantak Das, Chief Economist and Head Research & REIS, JLL.

In sync with net absorption, Bengaluru accounted for nearly 40% of the new completions during H1 2021. This was followed by Delhi NCR which accounted for 21% and Mumbai which witnessed 19% of the total new completions. New completions during H1 2021 were recorded at 25.11 mn sq ft, an increase of 75% year-on-year. 

New completions maintain growth in H1 2021

City	H1 2020 (mn sq. ft)	H1 2021 (mn sq. ft)	Growth (%)
Bengaluru	3.35	9.53	184%
Chennai	0.53	0.50	-6%
Delhi NCR	3.88	5.23	35%
Hyderabad	3.73	3.84	3%
Kolkata	-	-	-
Mumbai	2.29	4.73	106%
Pune	0.60	1.28	115%
Total	14.38	25.11	75%

Source: Real Estate Intelligence Service (REIS), JLL Research

Vacancy in Grade A office space shot up to nearly 16%

	H1 2018 (%)	H1 2019 (%)	H1 2020 (%)	H1 2021 (%)
Top 7 Markets	14.0%	13.3%	13.1%	15.8%

Source: Real Estate Intelligence Service (REIS), JLL Research

Due to a steady pipeline of assets coming online, the demand-supply gap has momentarily widened. Vacancy levels across the top seven markets rose to nearly 16% at the end of the second quarter breaching the comfort zone of 13-14% for the first time since 2017. Nevertheless, with demand expected to pick up in the coming quarters, vacancy is likely to return to sub 15% levels, believes JLL.

Rentals continue to remain rangebound

Office rentals remained stable across the major office markets in India in Q2 2021. However, landlords continue to be accommodative to the demands of occupiers and support deal closures. With vacancy levels already hovering at around 16%, the next few quarters will be critical in terms of pick-up in demand while maintaining the market buoyancy as planned supply enters the market.

Occupiers remain optimistic about the future

The resilience displayed by the office market in India since the pandemic owes much to the fact that the IT/ITeS sector has been largely unaffected by the economic downturn. IT/ITeS occupiers continued to account for most of the office leasing activity in 2020 at around 50%. In 2021, we expect the IT/ITeS sector to remain the key occupier group while demand from emerging sectors such as e-commerce, manufacturing and healthcare is likely to increase further.

Taking cues from 2020, the second half of the year is expected to witness increased momentum in the office space. In 2021, net office absorption across seven major cities is likely to remain flat at around the levels of 25.6 million sq feet achieved in 2020, in case there are no further lockdowns. In a nutshell, if vaccination targets are achieved and we do not see another major outbreak of the virus, the year 2021 is most likely to close on an encouraging note