Supply correction – a good sign for the Mumbai office market

June 27, 2013 / By  

The economic slowdown has affected industries throughout the country. Indicators in 2012-13 such as GDP and the Index of Industrial Production signify weak performance for the Indian economy, but a recent reduction in the inflation rate and monetary easing offer some hope of revival.

This uncertainty has impacted the real estate sector, most prominently the office space market. Over CY 2012, there was a noteworthy dip of 35% in the Mumbai office market absorption in comparison with CY 2011, when the total absorption for the year was at the historical high level of 9.6 million sq ft. However, demand in the first half of 2013 indicates healthy improvement, witnessing more deal closures with larger transacted office space than was seen in the first half of 2012. The absorption levels in the first half of 2013 are expected to be higher by a robust 40% than the semi-annual averages of 2012.

On the other hand, much of the supply of office space becoming operational in CY 2012 was at improper commercial locations, resulting in low demand and high vacancy rates. Occupiers stayed away from these projects because either they were far from the commercial sub-markets of the city or there were travel connectivity concerns. Observing this scenario, the developer community became cautious about launching new office space projects. So far this year, there have been minimal project launches. As a result, the supply of Mumbai office space in terms of the number of projects is set to shrink by a notable 30% by 2015 from current levels.

Nevertheless, upcoming projects over the next two years are located in the commercial pockets of the city that have modern amenities to meet business needs and are attracting tenants, and the pre-commitment levels reflect this.

There is a silver lining to sustainable demand in that several reforms, such as the approval of banking licences for several private institutions and the demand for office space from foreign retail chains that are expected to arrive after FDI is allowed in the retail sector, are expected to generate demand for office space over the coming quarters. Meanwhile, companies will continue to consider corporate real estate strategies, such as relocation and consolidation, to cut costs. Cash-rich companies are likely to take advantage of the somewhat stagnating capital values and rents to buy and lease out office space, respectively.

A decrease in both sub-market vacancy rates and new office space supply will leave occupiers with limited office space options. In this scenario, developers can demand a premium on quality office spaces. For developers who are adventurous and have the courage to sail against the tide, this is a good time to launch commercial projects at the right commercial locations to reap the dividends in the coming years.

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