Office rentals rise across top 7 cities as new supply remains minimal

• Bengaluru, Pune, and Kolkata each observed a 7% annual increase in office rental values between H1 2023 and H1 2024.
  
• Mumbai metropolitan region (MMR) and national capital region (NCR) registered a 5% rise each.
  
• From constituting 11% of the leasing market in H1 FY2020, coworking spaces constitute a 24% share in H1 FY2024.
  

Office rentals have gone up in top seven cities in 2023 when compared to the previous year. In Chennai, there was a 10% annual surge in the average monthly office rental values, rising from approximately ₹62 per sq. ft. in H1 FY23 to about ₹68 per sq. ft. in H1 FY24.

Following closely, Hyderabad experienced an 8% yearly growth, with the average monthly office rental value climbing from ₹61 per sq. ft. in H1 FY 2023 to roughly ₹66 per sq. ft. in H1 FY2024, according to ANAROCK research data.

Bengaluru, Pune, and Kolkata each observed a 7% annual increase in office rental values during this period, MMR and NCR registered a 5% rise each.

In MMR, the most expensive office market, the monthly average office rental value surged from ₹130 per square foot in the H1 FY 2023 to ₹136 per square foot in H1 FY 2024.

Meanwhile, in the NCR, the average office rental value was ₹81 per square foot in H1 FY23, witnessing an increase to ₹85 per square foot in H1 FY 2024.

In Bengaluru, the average monthly office rental value stood at ₹90 per sq. ft. in H1 FY2024, a rise from ₹84 per sq. ft. in H1 FY23. Meanwhile, Pune witnessed a shift from ₹74 per sq. ft. in H1 FY23 to ₹79 per sq. ft. in H1 FY24.

In Kolkata, the average monthly rental reached ₹58 per sq. ft. compared to ₹54 per sq. ft over the same period. Currently, the city boasts the most economical office rental values among the top 7 cities.

Says Prashant Thakur, regional director and head , research, ANAROCK Group, "Research data indicates that Grade A office rental values averaged at ₹83 per sq. ft. per month across the top 7 cities in H1 FY2024, while in the corresponding period in FY23, it was approx. ₹77.5 per sq. ft."

“The rising demand and a diminishing supply for Grade A office space in prime locations is leading to a simultaneous increase in office rentals. Both international and Indian corporations are proactively searching for enhanced office spaces to accommodate the growing needs of their expanding businesses,” says Mohit Batra, Regional Director, Realistic Realtors, a real estate firm.

Commercial leasing remain tepid

During the period mentioned, however, there was a notable lack of momentum in commercial office space activity across the top 7 cities. Both the net absorption of office spaces and the completion of new office developments remained relatively unchanged compared to the corresponding period in the previous year.

The increase in new office supply across these cities was minimal, with a mere 5% rise in H1 FY24 in contrast to H1 FY23. Simultaneously, the net absorption of office spaces experienced a slight annual decrease of 1% during this timeframe.

“It was widely anticipated that commercial office space demand in India will see a downturn amid layoffs by several large corporations worldwide, and shrinking business volumes," says Thakur.

Co-working spaces continue to be in demand

In terms of net absorption categorised by sectors, the information technology (IT) and IT-enabled services (ITeS) segment maintained its dominance in leasing activities during the first half of Fiscal Year (H1 FY) 2024.

However, there has been a consistent decline in its overall contribution to leasing transactions year after year. In H1 FY2020, the IT/ITeS sector held a 46% share in overall leasing activities, but by H1 FY2024, this share dwindled to a mere 29%.

Consequently, there has been an uptick in the share of coworking spaces. From constituting 11% of the leasing market in H1 FY2020, coworking spaces constitute a 24% share in H1 FY2024.

This shift indicates a changing preference among corporations of varying scales, who now perceive flexible workspaces as a practical and more cost-efficient alternative for their operations.