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

With 10.6 million sq. ft, Bengaluru leads in

Key Highlights:

• Bengaluru leads the flex space stock in the country at 10.6 million sq. ft.
• The city also has a higher penetration of flex space in the country at 4.8% as compared to the national average of 3%
• Bengaluru and Delhi NCR together account for more than 50% of the flex space stock in India, with Bengaluru housing around 10.6 million sq ft of such spaces
  
  
  

  With 10.6 million sq. ft, Bengaluru leads in flex space
  stock in the country: JLL

  The city’s flex space penetration at 4.8% is higher than the national average at 3%

  Bengaluru leads the flex space stock in the country at 10.6 million sq. ft according to JLL report - Reimagine Flexspaces A 360⁰ view. The city also has a higher penetration of flex space in the country at 4.8% as compared to the national average of 3%. Market penetration basically represents flex space as a proportion of total office stock. Bengaluru and Delhi NCR together account for more than 50% of the flex space stock in India, with Bengaluru housing around 10.6 million sq ft of such spaces.

   The demand for flexible spaces in large cities such as Bengaluru is likely to grow, with businesses having a greater need for such spaces to accommodate portfolio expansion and contraction along with crisis support to flex their space needs as necessary.

  
  
  
  
  “Bengaluru has one of the best ecosystems for the development and evolution of flex spaces in the country. Therefore, it is no wonder that, today, the city almost leads in flex apace absorption owing to its large numbers of startups and IT/ITES companies, “saidRahul Arora, Managing Director, Bengaluru, JLL.

   The country is expected to witness deeper penetration, throughout 2021 and beyond, the flex space market is forecast to grow at a slower pace and more organically. Irrespective of several short-term disruptions and challenges, increased demand from large enterprises, will support the growth of the flex space market to more than 50 million sq. ft. by 2023. It is anticipated that flexible space will grow by an average of around 15-20% per annum over the next three-to-four years, although this trajectory will not be linear. Previously expected levels of new investment are unlikely to be seen, as operators look to solidify their existing operations and it is likely that certain operators will not be able to weather the storm.

   As corporates return to the workplace, they are likely to further leverage flexible space to reduce capital expenditure and create cost savings, while allowing for split teams and de-densification requirements. Developments that initially drove the growth of the flex market, like the focus on utilizing workplaces to boost productivity and drive dynamic work cultures, enhance emphasis on employee health etc., will continue to influence the next phase in India.

   “While the flex-space market more than tripled in the last 3 years, the momentum going ahead will be relatively slower. Players are likely to tread cautiously, and the overall market is expected to expand 1.5 times from the current size. At the same time, demand for flexible space is likely to remain resilient and we expect the size of the flex space market to cross 50 mn sq. ft. by 2023 led by increased demand from larger enterprises,” Dr Samantak Das, Chief Economist and Head of Research & REIS, JLL India.

   In the commercial real estate space, flex spaces have become synonymous with adaptability. As preferences evolve, a range of flexible space options have taken shape to suit changing business needs, including remote working. To respond to the current disruption, and to lay the groundwork to deal with what may be permanent changes for the industry, flex space operators have been agile and are re calibrating their business strategies. They are now laying a greater emphasis on profitability and evolving strategies to ensure stable occupancy levels in their flex space centres.

   Large enterprises to drive demand

   The densification trend that had emerged over the last decade will likely reverse with enterprises leaning on flexible office space to relax space density. Large enterprises might also look at splitting up their offices to reduce commute times and dependence on public transport. However, with expected economic uncertainty, companies will be hesitant to commit large capital to real estate. In terms of strategy, leasing directly to a third-party flexible space operator is the most widely adopted model. A partnership model allows both landlords and operators to leverage each other’s strengths. There are several ways to implement a partnership, with revenue shares and management contracts being the most common. Under the revenue share option, both parties split the upside. In the case of a management contract, the operator gets a fixed payment, while the landlord assumes all the leasing risk and enjoys the upside. Despite the benefits of this approach, partnerships are relatively less common in India for now.

   What the future holds

  The entry of more than 300 flex space operators into the country helped commoditize the market. Prior to the pandemic, most of these operators were focused on attaining scale and capturing market share. However, the availability of capital, in the current scenario, will be a challenge. Players who have embarked on aggressive growth so far will find themselves strapped for capital. In such a scenario, the market is likely to witness consolidation activity driven by larger operators with financial wherewithal acquiring smaller ones. Flexible workplaces will continue to be a major influence on the future direction of the Indian office market. There will be an even greater focus on providing customized office space solutions and demand for flexible space will not only return but increase, as occupiers embrace the core plus flex model more widely. Despite the massive disruption from the impact of COVID-19, the future of flexible workspaces will remain optimistic