India's Highest Office Leasing in Five Years: A Sign of Thriving Businesses and a Booming Economy

India’s office leasing space has seen a significant growth over the last few years. Demand for office spaces in major cities like Bengaluru, Mumbai, Delhi and Hyderabad has been growing consistently, driven by robust economic activity across sectors. Expansion of sectors such as IT, e-commerce and financial services have driven this growth, as these sectors require modern and scalable offices to broaden their operations.

A recent report from Fitch expects India’s GDP to expand 7.20% in FY25, up from the previous estimate of 7.05%. India's key infrastructure sectors, including real estate, renewable energy and roads, are expected to see a considerable rise in investments over the next two fiscal years, as per a report by CRISIL Ratings. These sectors are estimated to see a 38% increase in investments compared to the last two years, reaching a total of Rs. 15 lakh crore (US$ 181.25 billion). Specifically, the real estate sector is anticipated to witness consistent demand growth of 8-12% in both the commercial and residential segments. A report by Cushman & Wakefield stated, ‘2024 is likely to be a significant year for India’s office market marked with accelerated growth and renewed optimism’.
 

Market structure

Vacancy rates are the key parameter to gauge the confidence of businesses in any economy. The vacancy rate tells us how many offices or workplaces are unoccupied or vacant. Data from a CREDAI report shows that vacancy rate pan-India was around 17.2% in Q1 CY24 (v/s 18.5% in 2021). Nevertheless, overall demand in Q1 CY24 outpaced supply with over 16.8 million square feet (MSF) in demand, for which only 10.5 MSF was in supply.

If we look at the region-wise breakup, Delhi-NCR and Bengaluru contributed 45% to overall demand. Chennai has the highest demand to supply ratio of around 4.7x, followed by Mumbai Metropolitan Region (MMR) at 4.0x.

When it comes to vacancy rates in major cities, Bengaluru stood at 9.8%, MMR 16.7%, Delhi NCR 23.9% and Hyderabad 24.8%. Vacancy rates have been falling in the Delhi-NCR region but increasing in Bengaluru.

While Bengaluru dominated demand in Q1 2024 with 29% share in total leasing, space uptake in Hyderabad registered the highest growth of more than 100% on Y/Y basis.

Sectors – Key trends

• Information Technology (IT)

IT/ITeS, in its return-to-office mode, dominated the leasing demand share, contributing almost 28% to office demand in Q1 CY24. IT/ITeS generated 35% of the sector’s demand in Bengaluru, 39% in Delhi-NCR and 34% in Hyderabad.

• Banking, Financial Services and Insurance (BFSI)

The BFSI sector’s share in leasing demand grew from 16% in Q1 CY23 to 20% in Q1 CY24. About 50% of the BFSI demand came from Mumbai and Chennai alone. The sector commands 39% in Mumbai overall.

• Healthcare

The healthcare sector held 12% market share in Hyderabad and 5% in Chennai. Overall, pan-India, co-working spaces accounted for 10% market share in all the sectors. 

Top five trends driving India’s office leasing space

• Increasing occupancy rates and rebounding rental growth:

Q1 2024 registered office leasing of 13.6 MSF across the top six Indian cities, representing a 35% Y/Y rise. New supply remained steady at 9.8 MSF, almost at par with levels seen in Q1 CY23. With demand outpacing supply, average rentals rose 4% Y/Y and vacancies remained rangebound. The major trend in the Indian leasing space is increasing occupancy rate in the post-COVID environment as depicted in the chart below.

The occupancy rate has been rising, accounting for the hike in rent across the nation. While the rents were stable in 2023, this trend is expected to change over the next couple of years due to the increased occupancy demands and space enquiries. Accordingly, rental rates across the top eight cities, viz. Delhi, Bengaluru, Mumbai, Hyderabad, Chennai, Pune, Kolkata and Ahmedabad, are expected to increase by 3-5% over the next year, with Global Capability Centres (GCCs) fuelling rental growth. This trend has led to a shift in landlord sentiment, a 4-5% increase in occupancy cost, and encouraged early rental renewals and restructuring decisions. At the same time, the occupiers are now looking for central locations that are less sensitive to rental growth.

• GCCs projected to contribute over 40% to total office demand by 2025:

According to Colliers’ latest report titled ‘GCCs in India’, GCCs are expected to lease about 45-50 MSF of office space over the next two years, accounting for approximately 40% of the total office demand across the top six Indian cities. In H2 2023, gross leasing by GCCs stood at 12.4 MSF, the highest since 2020. This space was dominated by US-origin GCCs from the tech and BFSI sectors with 71% share, followed by EU-based GCCs. Bengaluru and Hyderabad led GCC leasing activity at a cumulative share of 60% from 2020 to 2023.

• Work-from-office policies:

The focus has been to bring employees back to the office amid concerns over factors such as collaboration, innovation, productivity and efficiency among business leaders. The year 2023 saw mandates from some companies requiring employees to completely return to office and others offering hybrid work strategies with 2-3 days/week. On average, the office occupancy rate increased to 70% as of November 2023 compared to 40-50% at the end of 2022. The hybrid work model has been a win-win for both employers and employees. As a result, tier-2 cities are seeing a rise in office space enquiries as organisations are looking to seize the opportunity for flexibility and talent attraction/retention.

Below we mention key examples of organization’s increasing focus on resuming work from office:

• TCS has introduced a new policy linking employees' quarterly variable pay to their office attendance where employees spending less than 60% of their time in the office would not receive any variable pay, while those with 60-75% attendance will receive 50% of it.
• Employees from specific business units in Infosys can request work from home of up to 11 days per month through their employee experience platform InfyMe.
• Cognizant's CEO, Mr. Ravi Kumar, revealed plans for a new app which will allow managers to generate rosters according to the needs, complementing the FlexiSeat app for seat bookings across its premises. It is aimed at ensuring adherence to in-office work policies, which were introduced earlier in the year for improved monitoring of employee presence.
• Emergence of co-working space, including start-ups: 

The recent rise in co-working spaces is also a notable trend, catering to start-ups and other small businesses seeking flexibility and cost-effective workspace solutions. Co-working spaces in India are prepared to expand their capacity in the next 12-24 months due to the addition of multinational companies in India, which has also been a key driver of growth. India’s flexible workspace market is projected to reach 126 MSF by 2028 from 61 MSF in 2023, as per Avendus, a private equity advisory firm.

Government initiative

The start-up ecosystem of India is not only innovative and ambitious but also has a strong entrepreneurial spirit. India, a nation among the top three start-up communities, has always been a land for coming up with new ideas and turning them into reality that has also launched many dreams into the sky.

What makes India a start-up hub is digital infrastructure, business-friendly reforms, capital from the government and the entrepreneurial spirit of its people. As of March 14, 2024, there were a total of 1,23,900 DPIIT-recognised start-ups in the country. At least one recognised start-up was available in each state, with 12 lakh direct jobs in the recognised start-ups, as of December 31, 2023. All these government initiatives will fuel the need for office spaces, which can be a major source of filling the vacant offices along with meeting the supply.

Wrapping up

Major technology hubs like Bengaluru and Hyderabad are anticipated to lead the way in project completions for office space over the next three years. While the high demand for premium office space in desirable locations will likely keep vacancies in prime micro markets rangebound, headline jobs across India are expected to rise because of the significant supply addition.

The growth of the technology sector as well as rising demand for shared office spaces and co-working facilities, is further fuelling the expansion of India’s office leasing market. Moreover, government initiatives promoting the business growth and investment are boosting confidence among domestic as well as international investors, further contributing to the vitality of the commercial real estate sector.