Returning covid casts a shadow over commercial realty sector

The leasing activity for office spaces has recovered from the recent lows, even so, key metrics such as vacancies and rentals are yet to see a meaningful improvement. Unfortunately, as things stand, the outlook is not bright.

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“This sector is still not out of the woods. Renewed worries of covid may prompt companies to delay their decisions to re-lease or expand,” said an analyst seeking anonymity. Also, some markets such as Hyderabad are facing a situation of oversupply, which does not bode well for the rental outlook unless demand significantly rises, he added.

In a double whammy of sorts, the IT sector, a key driver of grade-A office property leasing in India, is dealing with demand uncertainty issues. A concern is that the lack of clarity on global macro-economic conditions may keep global IT giants in a wait-and-watch mode, leading to slower hiring and lower outsourcing of work to India. Consequently, it may hurt demand for office spaces.

The US economic recession concerns are making it difficult for global IT companies to take cognisance of how the event could impact their revenues in the next few quarters, said Vivek Rathi, director research, Knight Frank India.

So, they have turned cost conscious for the near-term. “This is already reflecting in the weak performance of REITs listed in the US. In India, it is much better, however, these global trends are likely to have some impact with moderating office transactions in the next few quarters,” he added.

The recent trends in office space vacancies across key cities in India have not been encouraging. At an all-India level, this parameter witnessed a marginal sequential decline in Q3CY22 (see chart). As a result, on a sequential basis, rentals across key metros remained largely flat during this time. On a year-on-year basis, rentals have seen an increase, but some growth can be attributed to a favourable base of last year.

According to Rathi, the office space segment is likely to exit 2022 with an average vacancy of 17-18%. In 2023, the all-India vacancy could be hovering at the same level. “On an average, rentals are expected to have grown by 4-8% in CY22, we expect moderate improvement from these levels in CY23,” Rathi added.