APPD Market Report Article

Chennai

November 29, 2022

Dr Samantak Das, Head of Research, India & Sri Lanka

4.8%

INR 73.5

Rents
Rising

Flex emerges as a key occupier category

  • The Chennai office market sustained its momentum with around 1.1 million sq ft of gross leasing activity in 3Q22. The SBD Old Mahabalipuram Road (OMR) and SBD submarkets together contributed to 62% of leasing activity in the quarter. Net absorption was marginally higher at 0.54 million sq ft during the quarter, and was also already higher for the period of Jan-Sep 2022 compared to full-year 2021.
  • The new completion in the CBD was fully pre-committed, reflecting the undeterred appetite for office space in the CBD. Flex space providers (43%) and consultancy firms (17%), along with tech (14%), emerged as major demand drivers, together contributing 74% of the leasing activity in 3Q22.

Quality supply additions in CBD and PBD OMR

  • A total of 1.1 million sq ft was added to the city’s Grade A office stock in the quarter. Prestige Metropolitan and Featherlite The Address were the major completions in 3Q22, in the CBD and post-toll (PBD) OMR, respectively.
  • Vacancy was up by 57 bps q-o-q to reach 10.27% at the end of the quarter. Vacancy remained tight in the SBD and SBD OMR submarkets, while occupier demand picked up traction in the PBD OMR.

Rents and capital values up marginally q-o-q

  • The revival of occupier demand since the start of the year has allowed landlords to quote higher rents. However, on the ground this was mostly only applicable for quality projects and new completions.
  • Rents were up by 5.4% y-o-y while capital values have moved by 7% y-o-y. The PBD OMR recorded a 10% rent escalation y-o-y, owing to quality new completions and proximity to the IT corridor. The rent escalation in submarkets with tight vacancy levels, like the CBD and SBD OMR, was around 1% on a y-o-y basis.

Outlook: Demand outlook is steady but global headwinds visible

  • Developers are optimistic about demand prospects, especially for Special Economic Zones (SEZs), in anticipation of the revised SEZ bill that will allow for greater occupier traction. Proposed policies encouraging startups should also support demand for space. Improving office re-entry rates are expected to support expansion plans and create further demand for office space.
  • The resurgence in the market is expected to make room for rent escalations in the near to medium term. Vacancy is expected to remain stable at around 10%, with a trend of healthy demand and supply. Global headwinds may cause slight sluggishness in occupier decision making, but this should not be a long-term trend given India’s growth as a tech as well as emerging manufacturing destination.

Note: Chennai Office refers to Chennai's overall Grade A office market.

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