Office market touches 34.7 mn sq ft transactions in H1 2024; may double by year end on the back of demand from IT firms

Office space market across the top eight cities in India recorded its highest ever transaction volume in a half yearly period at 34.7 million square feet (mn sq ft) in H1 2024. The transactions recorded a YoY growth of 33% in H1 2024 from 26.1 mn sq ft in H1 2023. This is expected to touch more than 70 mn sq ft by the end of the year on the back of renewed demand for office space from IT and ITeS companies in the next few months, Knight Frank India said in its report released on July 4.

“We are staring at an office absorption opportunity of more than 70 mn sq ft before the end of the year. We are currently at 34 mn sq ft. The second half of the year may see demand for offices picking up from the IT and ITeS segment. This segment which commanded 40% share in office leasing before COVID-19 is now at barely 10%. This demand is expected to bounce back in the next few months propelling the commercial space take-up to go beyond 70 mn sq ft by the end of the year,” explained Viral Desai, Senior Executive Director, Occupier Strategy & Solutions, Industrial & Logistics, Capital Markets and Retail Agency, Knight Frank India.

Also Read: Office leasing touches 33.5 mn sq ft in the first half of the year, up by 29%: JLL

He explained that while return-to-work has picked up in India, it has not taken off in the United States. “With employees not willing to return to work and the cost of hiring going up in the US, some companies may be compelled to outsource work to India, a large part of which may be taken up by third party IT firms. These companies may take up close to half a million- million sq ft of space pushing demand for office space take-up," he said.

In Delhi-NCR, office space demand grew 11.5% to 5.7 million square feet. Bengaluru witnessed a 21% rise in office demand to 8.4 million square feet. In Pune, leasing of office space rose 88% to 4.4 million square feet. Chennai witnessed a 33% fall in office demand to 3 million square feet. In Hyderabad, office demand soared 71% to 5 million square feet. Kolkata witnessed a 23% rise in leasing of office space to 0.7 million square feet. In Ahmedabad, the office space leasing jumped to 1.7 million square feet.

These were some of the findings from Knight Frank India’s 21st edition of its flagship report - India Real Estate- Office and Residential Market (H1 2024), which presents a comprehensive analysis of the residential and office market performance across eight major cities for January – June 2024 period.

Bengaluru, the largest office market, recorded transactions of 8.4 mn sq ft

Bengaluru remained the largest office market with transactions of 8.4 mn sq ft accounting for 26% of total office volume transactions across eight cities in the country. Mumbai (5.8mn sq ft) and National Capital Region (NCR) (5.7 mn sq ft) were the other leading commercial markets in the country. Ahmedabad recorded the strongest YoY growth of 218% albeit on a smaller base. Chennai was the only market to see a reduction in transaction volumes due to acute limitation of grade A space in the city.

Vacancy rate reduced to 15.6%

The office market witnessed 25.1 mn sq ft of space completions in H1 2024. While vacancy rates reduced further backed by the robust demand for office space to 15.6 % in the first half of the year.

Chennai leads commercial rental growth

Robust demand also helped rents firm up across all markets over the course of the year as all major markets without exception saw a rise in rental values. Chennai led the rental growth with 9% YoY, as demand remained robust while supply remained severely crunched in the city.

Bengaluru with a rise of 7% YoY in H1 2024 witnessed the next best rental rise for the period, the report noted.

India-facing businesses dominate the market

India-facing businesses have dominated the market in recent periods and have witnessed a steady increase. In H1 2024, India facing businesses leased 14.3 mn sq ft which constituted 41% of total volume of leasing as against 35% in H1 2023. This growth can be attributed to the strong confidence in the prospects of the Indian economy and consumer markets.

ALso Read: Office leasing records 16.7 mn sq ft in Q1 2024, witnessing a 20% growth y-o-y

Maximum commercial space absorption by GCCs

During the period, overseas corporates continued to scale up the value chain and offshore more business critical and value-added functions/ processes to their Indian GCCs. About 48% more space was absorbed by GCCs with transaction volumes of 9.8 mn sq ft in H1 2024 from 6.6 mn sq ft in H1 2023.

Bengaluru witnessed the highest GCC focussed transactions at 4 mn sq ft, followed by Hyderabad at 3 mn sq ft.

Though GCC recorded a mark-up in its share, India Facing Business continued to anchor the office market with 14.3 mn sq ft of office market transactions in H1 2024. Mumbai led the half yearly office transactions of India Facing Business at 4.6 mn sq ft, followed by the National Capital Region at 3.1 mn sq ft, the report showed.

Share of flex space operators rebounds

The second half of 2023 had seen the share of flex space operators fall to a post pandemic low of 11% as occupiers showed a marked preference for longer term leases. 2024 has, however, seen occupiers coming back to the flex space market as the premise of a workplace specialist that enhances employee productivity remains strong.

ALso Read: Flex office space contributes to more than one-third of Delhi-NCR's office leasing activity in Q1 2024

Flex spaces accounted for 21% of the total volume transacted during the H1 period. Co-working spaces constituted a massive 72% of all flex space transacted during H1 2024 compared to 58% in H1 2023. Flex space operators took up 7.2 mn sq ft during H1 2024 while Third Party IT Services accounted for 3.4 mn sq ft of office space transactions during the period, the report showed.