APPD Market Report Article
MumbaiAugust 26, 2022
Dr Samantak Das, Head of Research, India & Sri Lanka
Net absorption decreases marginally by 8% q-o-q in 2Q22
- The city’s net absorption was lower by 8% on a q-o-q basis but was more than double y-o-y. Net absorption of 1.33 million sq ft was recorded during the quarter with the majority of the absorption coming from non-IT occupiers – consultancy businesses (27%), manufacturing/Industrial (17%) and BFSI (7%) while the IT/ITes sector contributed to 26% of the total leasing.
- SBD Central led the quarterly leasing activity, followed Navi Mumbai and SBD North. The majority of space take-up was in new buildings completed in the past 12 months. There have been several medium-sized deals in SBD BKC, Thane and both the suburbs during the quarter. Space take-up by co-working operators (10%) was also seen, as demand for managed workspaces grew.
Supply addition of 0.7 million sq ft in 2Q22
- One new project – One Lodha Place Upper Floors, with 700,000 sq ft in SBD Central – was completed during the quarter. IL&FS (457,122 sq ft) in BKC went for refurbishment and Newcastle (754,160 sq ft) was converted to a data centre and hence both were excluded from Mumbai’s total office stock. This led to total stock decreasing by 0.51 million sq ft to 145.2 million sq ft.
- With quarterly net absorption higher than supply, vacancy rate dropped by 120 bps q-o-q to 14.6%.
Rents and capital values record marginal rise
- Overall city rent increased marginally in 2Q22. However, weakness in rents was seen in SBD North and Thane, which generally have properties with high vacancy and assets of lower grades. A noticeable rise in capital values was seen in the sub-markets like BKC, West and East Suburbs, which have low vacancy levels and a scarcity of quality assets. Yield compression was also seen.
- As an after-effect of the pandemic, occupiers have been trying to realign their real estate strategies and reduce real estate costs by renegotiating rents, reducing existing office space and relocating to buildings with lower rents. Landlords did not lower rents but offered occupiers extended rent-free periods and were willing to take up CapEx on fit-outs.
Outlook: Supply to outpace demand in 2022
- About 5 million sq ft of office space is scheduled for completion in 2022. An optimal pace of construction activity is expected as long as COVID-19 cases remain under control. Demand for flex space and managed workspaces is likely to be high, as occupiers prefer fully fitted options to save costs and look to implement the hub-and-spoke model as de-densification and BCP gain importance.
- Demand is expected to be driven by medical technology, health analytics, online education, data centres, gaming, pharma and FMCG sectors. Towards the end of 2022, supply is expected to outpace demand, leading to an increase in vacancy. Capital values are expected to climb faster than rents due to rising investor interest, leading to a compression of yields in key submarkets.