Office market net absorption at a two-year high at 11.56 million sq. ft in Q42021, up 86% Q-o-Q: JLL

Mumbai, January 4, 2021: Indian office sector ended the year 2021 with net absorption for Q4, 2021 (October-December 2021) at 11.56 million sq. ft, the highest in the last eight quarters, and up by 86% Q-o-Q, according to JLL’s Office Market Update-Q4, 2021. On a half-yearly basis (six months), net absorption was up by 26% for the H2 periods (July-Dec 2021) on a Year-on-Year (Y-o-Y) basis. In Q4 2021, the markets of Bengaluru, Hyderabad, and Delhi contributed 61% of the total absorption. Hyderabad surpassed Bengaluru with 3 million sq. ft of net absorption recorded during the quarter, pushing Bengaluru to second place which followed closely with 2.4 million sq. ft.
Older pre-commitments also held firm and were an indicator of occupier confidence in business and growth. Pre-commitments were a major driver of net absorption with 60% of the new supply which came on-stream in Q4 2021, already pre-leased. On a full-year basis, net absorption was up marginally by 2% Y-o-Y at 26.2 million sq ft. For the entire year of 2021, Bengaluru led with a 30% share of net absorption, followed by Delhi NCR and Hyderabad. All three cities together accounted for nearly 64% of net absorption in the year 2021.
“While net absorption was up marginally, we have observed greater traction in overall leasing activity. The Gross Leasing Volume (GLV)* for the last quarter of 2021 was recorded at the pre-Covid levels as seen in Q4 2019 at 15 million sq. ft. This is also the highest in last eight quarters and higher than the average quarterly GLV numbers during the pre-Covid (2018 and 2019) period as well. On a yearly basis, GLV of 2021 was still lower Y-o-Y. This was due to the lockdown in the wake of the second wave during early 2021 and a more measured approach towards real estate activity thereafter. With a greater understanding of employee expectations and a hybrid form of working best suited to them, most firms had reworked their workplace strategies. Real estate decisions were well-placed to be taken, given a deeper understanding of the future of work and evolving work culture,” said Radha Dhir, CEO and Country Head, India, JLL.
“Term renewals have risen by nearly two times since 2018-2019 and were recorded at over 13 million sq. ft in 2021, clearly indicating that in a period defined by Covid, occupiers were looking to save costs. A total of 481 term renewal deals were recorded during the year compared to 203 in 2020 and 193 deals in 2019. Developers were also quite active in keeping portfolio occupancies high by incentivizing term renewals,” she added.
The cities of Bengaluru at 30%, Delhi at 21%, and Hyderabad at 19%, together contributed to 70% of the GLV recorded in the last quarter of 2021.
Office demand is driven by IT/ITes
IT/ITeS (42%), Manufacturing (15%), and flex space providers (10%) contributed to 67% of the total leasing activity in Q4. For the full year 2021, IT/ITeS remained the leading occupier category with a 38.9% share of leasing activity, followed by manufacturing/industrial (15.4%) and flex space with an 11% share.
“For most occupiers their real estate plans are intact and in fact, an active demand of 33-35 million sq. ft is already matching pre-Covid levels. This is a clear sign of the long-term confidence that occupiers have for India as a vital cog to their operations and towards the role of the office in their future. In any case, we forecast a net absorption of around 31-33 million sq. ft for 2022, up by 20-25% Y-o-Y.  We also forecast around 45-47 million sq. ft of upcoming supply in 2022 which is already pre-committed to the extent of 25-26%. The top developers (based on city-level Grade A office space ownership and well-known national/regional brands), are expected to contribute around 58% of this upcoming supply and have recorded pre-commitment rates of nearly 42-45%, which again signifies the long-term outlook for business and need for offices among occupiers,” said Dr. Samantak Das, chief economist and head research and REIS, India, JLL. 
New supply of 9.12 million sq ft was completed in Q4 2021, down by 16% Q-o-Q. Markets of Bengaluru, Hyderabad, and Pune headlined new completions in the quarter, with over 60% of the supply coming on-stream in Q4, already pre-committed.  While 95% of the new completions were pre-committed in Hyderabad; Bengaluru and Pune witnessed 37% and 45% pre-commitment rates in the new supply. For the year 2021, the new supply addition was recorded at 45.7 million sq ft and was higher by 23% y-o-y. Bengaluru led with a 33% share of annual supply in 2021, followed by Hyderabad with 20% and Delhi with 19%.
Rentals remain range-bound
Overall office rentals remained largely stable across most major office markets in India in Q4 2021. However, Delhi NCR witnessed rental growth of 1.7% Q-o-Q.  Landlords continue to be accommodative to the demands of occupiers and support deal closures.
Vacancy dropped from 15.9% in Q3 2021 to 15.3% in Q4 2021 backed by good leasing activity. For the first time since the pandemic broke, demand has surpassed new supply and hence vacancy has dropped by 60 bps Q-o-Q.  The limited infusion of new supply and good demand has aided in keeping the vacancy levels well below 16%. Vacancy levels in Pune continue to remain in single digits while in Bengaluru now stand at 10.0%.
With the market recovering in terms of demand momentum and good quality supply pipeline by reputed developers and healthy pre-commitment rates, the vacancy is expected to remain within a tight range in the coming quarters.
Looking ahead
Given the rise in Covid cases as we enter the new year, return to work plans for corporates may see some delay as they keep a close eye on the events unfurling over the first quarter of 2022. Both occupiers and landlords are likely to continue with their cautious approach and will want to ‘wait and watch on how the market pans out over the next quarter or so.