Net Absorption of Office Spaces Declines 45% in 2020

<span style="font-weight: 400;">The office market in India reached its peak in 2019, with net absorption of Grade A spaces crossing 46 million sq ft and new completions breaching the 50 million sq ft mark. In 2020, the net absorption of office spaces was 25.5 million sq ft, registering a 45 per cent

BY Realty Plus
Published - Feb 25, 2021 3:42 AM

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The office market in India reached its peak in 2019, with net absorption of Grade A spaces crossing 46 million sq ft and new completions breaching the 50 million sq ft mark. In 2020, the net absorption of office spaces was 25.5 million sq ft, registering a 45 per cent drop while new completions reached 36.4 million sq ft, recording a 27 per cent decline, according to a recent report by JLL India. The year 2021 is expected to witness close to 38 million sq ft of new completions, while net absorption is likely to hover around 30 million sq ft, the report added. The Covid-19 pandemic and subsequent containment measures brought about unprecedented challenges for the office sector in the second quarter of 2020. Corporate occupiers were forced to adopt work from home practices and reimagine their workplace strategies. Major real estate decisions were delayed, hampering demand. Additionally, a cautious approach to capital expenditure was adopted. These changes are likely to shape the future of the office market in India. A future-fit organisation will be characterised by a hybrid work model including home offices, flexible workspace, satellite offices, and headquarters. Moreover, companies are rethinking their office locations and evaluating the feasibility of establishing a network of offices spread across different locations. Vacancy in Grade A office spaces in India have stayed below the 15% mark since 2017. Even during a pandemic riddled year, vacancy increased marginally and is expected to remain range-bound in 2021 as well. Given the range-bound vacancy levels, office rents in 2020 remained stable across the seven major office markets in India. The Indian flex space market grew at a CAGR of about 50% between 2017 and 2019, accounting for as much as 14% of the leasing activity in 2019. This growth was halted by the pandemic in 2020. The current market penetration of flex spaces in total office space stands at about 3%. In 2021, India is expected to witness deeper penetration of flex spaces as corporate occupiers continue to shift away from long-term capital intensive commitments. JLL India expects the size of the flex space market to reach nearly 39 million sq ft in 2021. Institutional investments in Indian real estate saw definite short term pullback during the first three quarters of 2020. Most investors remained cautious as asset pricing and revenue stability became challenging, leading to a sharp reduction in the number of deals. However, large portfolio deals during the last quarter led to total investments of USD 5 billion during 2020, marginally lower than the previous year. Investors are likely to focus on assets with higher yields and lower rental growth to ensure stability of income. According to JLL India, there is Rs 55 billion investment opportunity in upgradation of office spaces in India. Listing of new REITs is expected to provide opportunities for institutional investors to build asset portfolios or co-invest with existing platforms before the IPO. The provision of the Union Budget 2021-22, allowing to raise debt from foreign portfolio investors at low cost will lead to more asset acquisitions by REITs. Office assets are expected to the preferred option due to stable rental yields and income visibility.