APPD Market Report Article
ColomboDecember 1, 2021
Heightened occupier activity
- Demand for office space was predominantly driven by IT/ITeS occupiers, with HCL Technologies’ landmark deal with John Keells accounting for the majority of the demand. The transaction included 110,000 square feet of NLA, which represents at least 80 per cent of the NLA at “The Office,” the commercial portion of the mixed-use development project Cinnamon Life.
- In 3Q21, the office market recorded an absorption of 4.4% and a net absorption of 107,000 square feet. Overall office occupancy remained stable during the quarter, owing to the Government of Sri Lanka’s (GoSL) selective permission to keep offices open during the lockdown. The majority of the firms took a flexible approach, with employees returning to offices on a rotation basis.
Delay in anticipated completions
- The overall vacancy rate for Colombo declined to 18.9% from 22.7% in 2Q21, reflecting a dip of 3.8% q-o-q, as a result of increased occupier activity in the CBD submarket during the period. Vacancy rates in the SBD submarket, on the other hand, were relatively stable throughout the year.
- No new supply entered the market in 3Q21. Anticipated projects including the EKROMA tower and Havelock City Mireka were delayed due stringent import regulations imposed by the government in response to the current foreign exchange market conditions.
Short-medium period supply pipeline softening rentals in 3Q21
- Rents of Grade A office softened by 4.3% q-o-q resulting in average price per square foot at LKR 312.26 in response to the more premium supply entering the CBD market in 2Q21.
- There has been a marked decrease in concessions and discounts granted by landloards, and face value rents are gradually returning to pre-pandemic levels as office employees readjust to ‘new normal’ routines and return to offices.
Outlook: New supply to be expected in 4Q21
- The market anticipates new supply with the completion of two prime A grade buildings scheduled for late 4Q21, including the delayed project EKROMA in the CBD and the JFI tower in the SBD. The fresh additions in 4Q21 are expected to increase overall Grade A stock by 393,000 sq ft by the end of 2021.
- The average rent for Grade A offices is expected to soften further as new supply enters the market. Nevertheless, due to the high cost of construction, rentals for new Grade A offices will continue remain higher than rents for old Grade A buildings.