The IT hub of India, Bengaluru, witnessed a net absorption of 2.7 mn sq. ft. of office space in the third quarter of 2020 (Q3), on par with Q1 2020 levels, according to JLL Research. The city saw new supply of 4.7 mn sq. ft. as compared to almost no additions in the previous quarter. Bengaluru is likely to witness an addition of 1 mn sq.ft. of office space in the next quarter of which 70% is pre-committed.
SBD (Outer Ring Road, Banerghatta Road) accounted for a two-third share of the total net absorption at 1.8 mn sq.ft. during the quarter. Leasing continued to be driven by IT/ITeS, followed by manufacturing/industrial and e-commerce sectors. “Within the city, the SBD submarket saw the highest addition of 3.2 mn sq.ft., followed by the peripheral markets of Electronic City and Whitefield. Outer Ring Road continues to be the most sought-after location with an over 60% share. It is imperative to note that prominent new supply was completely pre-committed in the previous quarters, coupled with the expected delays in construction, this could mean a supply crunch in near future,” says Rahul Arora, Managing Director (Bengaluru), JLL India.
While most technology firms still continue to work from home, leasing momentum continues to strengthen with a number of new Request For Proposals (RFPs) that were released in the market in October-2020, he added.
The city vacancy increased to 6.5% in Q3 2020 from 5.3% in the previous quarter due to the combined impact of higher net supply infusion into the market and significant exits by select large occupiers. Overall rents saw a marginal rise of 1% during the quarter on the back of higher occupancies. Whitefield saw the highest jump of about 2.3% in rentals, followed by SBD and Whitefield at 1.2% each. At the same time, select developers are willing to discuss and offer extended rent-free periods, discounts on parking charges and common area maintenance charges on a case to case basis. However, there are no instances of discounts on headline rents or rental waivers.
Positive outlook
In an attempt to rationalise operational costs and achieve an impact on the overall bottom line, an increasing number of large occupiers are looking to restructure existing leases. This trend is expected to continue into 2021, however, the silver lining is that a number of MNCs (with smaller or no footprint in India ) carrying out a similar exercise have started exploring opportunities to expand their footprint in Bengaluru.
The overall outlook for the city remains positive with continued investor interest and the recent land deal by Godrej Fund Management and active scouting of office assets by Blackstone and Brookfield corroborate this view.
Office absorption up
The country’s office market witnessed a net absorption of 5.4 million sq.ft. in Q3 2020, an increase of 64% versus Q2 2020. This is an encouraging trend especially after net absorption dipped almost at a similar rate in the second quarter. The third quarter office rebound growth was led by Bengaluru and Hyderabad, which together accounted for nearly 80% of the net absorption in Q3 2020. The heightened activity in Bengaluru indicates a gradual resurgence in take up of spaces coupled with the translation of pent up demand from Q2 this year.
While the share of IT/ITeS occupiers in gross leasing (as seen in the table) dipped to 43% in Q3 2020 from 61% in Q2 2020, e-commerce and manufacturing sectors gained significant shares during the third quarter forming 16% (negligible in Q2 2020) and 17% (5% in Q2 2020) respectively, owing to surging demand of e-commerce during COVID19.
New completions
New completions during Q3 2020 increased by 59% quarter-on-quarter with 9.2 mn sq ft of new stock coming to market. “With lockdown restrictions being relaxed in the third quarter in most of the markets under review, office projects in the final stages of construction or pending receipt of occupancy certificates came on-board. This resulted in an increase in the supply of office space, even surpassing 8.6 mn sq ft witnessed in Q1 2020,” says Samantak Das, Chief Economist and Head of Research & REIS, India, JLL.
In sync with net absorption, Bengaluru and Hyderabad led the increase in new completions accounting for 87% of the total new completions in Q3 2020. Notably, new completions in both these markets even went past the average new completion levels witnessed in the four quarters of 2019.
Vacancies and rentals
Increased office space consolidation and optimisation strategies of corporate occupiers resulted in subdued net absorption levels, which could not keep pace with new completions. This resulted in overall vacancy increasing from 13.1% in Q2 2020 to 13.5% in Q3 2020. Despite the rise in vacancy levels in southern markets, Bengaluru, Chennai and Pune continued to hover in single digits. This augurs well for a strong rebound in these markets when economic and business conditions improve in the coming quarters.
JLL Research
