C hennai’s economic activity prior to the IT boom in the 2000s was primarily driven by trading, port-centric business, and the engineering and manufacturing sectors.
The city was one of the early movers in tapping the potential of the technology sector in India, and the IT/ITeS sectors took off with the completion of TIDEL Park along the Rajiv Gandhi Salai (the erstwhile Old Mahabalipuram Road) in 2000. Apart from these government designated flagship projects (SIPCOT Siruseri and ELCOT Sholinganallur) along the IT Corridor, additional factors — such as the easy availability of large land parcels at competitive rates, an increasing talent pool and a swift approval process — encouraged private developers to establish IT parks and SEZ developments along this corridor.
This led to a period of formidable growth: the total available commercial office space in Chennai grew at a Compounded Annual Growth Rate (CAGR) of approximately 15% from 2005 to reach more than 64 million sq. ft. in 2018.
Next-gen office spaces
Over the last couple of years, the city has witnessed the launch of several new-age office spaces by prominent regional/ international developers. These developments are technologically advanced and use energy-efficient concepts.
In addition, these spaces are loaded with amenities meeting international standards and this has resulted in occupiers pre-committing space for expansion and consolidation. Interestingly, a majority of these projects have been launched in the preferred micro-markets of OMR Zone 1&2, off-CBD and Mount Poonamallee Road, which contributed to about 75% of the total office space during the last two years.
Apart from traditional office space occupiers such as Tech and BFSI, the city has witnessed diversification of occupiers over the last 2-3 years. New-age occupiers such as e-commerce and Global In-House Centers (GIC’s) have played a key role in the overall space take-up and contributed to about 5-10% or even more.
With negligible space taken up in 2017, the share of flexible space operators increased to about 10% during 2018. The government’s focus on developing start-up warehouses and providing them with incentives, coupled with the availability of skilled manpower and research institutes, is expected to increase the number of start-ups in the coming years.
In addition, the State government has tapped into the advantage of having excellent optic fibre network connectivity with the presence of three undersea cable landing stations. The recent policy has emphasised on further improving data centre infrastructure in the State. This will act as an advantage for large scale occupiers who are looking to expand their footprint in the city.
What to expect
As highlighted, Chennai has the right ingredients to sustain long term investments: excellent manpower, physical and social infrastructure, stable governance and policy initiatives, etc. Taking advantage of the above factors, the city’s commercial real estate market has witnessed exponential growth over the past decade.
While its southern counterparts, Bengaluru and Hyderabad, are significantly dependent on IT/ITeS corporates to sustain commercial demand, Chennai’s commercial activity is driven not just by IT, but by manufacturing and BFSI sectors, resulting in a comparatively stable commercial market.
Infrastructure and policy initiatives undertaken by the Sstate government are expected to further improve connectivity between the regions and augment commercial demand.
Supply vs. demand
The city is expected to see more than 17 million sq. ft. of supply in the next 2-3 years, which is 25% of the existing stock. A majority of these developments are lined up in preferred micro-markets along OMR.
Corporates from the IT sector will remain the demand drivers for office space, followed by occupiers from the automotive, BFSI, research and consulting sectors. In addition, operators from emerging sectors such as co-working are also expected to account for a major share of the demand in the coming years. Consistent demand and supply addition in key micro-markets is expected to result in rental appreciation in these locations over the next 2-3 years. While rents are expected to increase, occupiers might pre-commit space to hedge the rental risk.
OMR Zone 1 & 2 and off-CBD areas are expected to lead leasing activity in the coming years. In addition, locations such as OMR Zone 3 will also account for a major chunk of the leasing activity in the said period.
The author is Managing Director Advisory and Transaction Services
India, CBRE
