2016-17 Will Bring Biggest Fall in Office Space Vacancy

The following is the report by Ramesh Nair, COO & International Director, JLL India

Showing faith in India’s economic growth, corporate occupiers have been in expansion mode. Companies especially in the e-Commerce, telecom and healthcare sectors have been snapping up office space across major cities. This expansion is also reflected by the decline in office vacancy levels across the country – a trend that started in 2013 (see graph). By 2015-end, cities such as Pune, Bangalore, Hyderabad and Chennai had a vacancy rate of just 5-12%.

Vacancy in Bangalore has reduced from 16% in 2011 to 4% today. Chennai’s vacancy has come down from 32% in 2010 to 12.5% today. Hyderabad has also seen its vacancy reduce from 17% in 2009 to less than 10% now. Similarly, in Pune, vacancy has reduced from 18% in previous years to 5% today. The sharpest fall in pan-India vacancy is expected between 2016 and 2017 when it will be slightly less than 13%.

India’s office space absorption in 2015, at around 36 million sq ft was the second highest after 2011. Leading this bull-run were cities like Bangalore, Hyderabad, Pune and Chennai. While the absorption in 2015 was similar to 2011, it was distributed across new and old buildings this time.

Also, while the demand in 2011 was due to lower rentals after the global financial crisis in 2015, it was largely thanks to implementation of growth plans by corporates. Interestingly in 2014, demand had surpassed supply for the first time since 2007. Moreover, the demand forecast looks strong in the medium-term.

All this is prompting developers to build fresh supply across cities in order to meet growing demand. Developers, who had been shying away from commercial projects after burning their fingers between 2009 and 2012 owing to a lack of understanding of the commercial asset class and lack of funding, are returning to the market. As demand continues to pick up, occupiers will start taking up spaces in less ideal locations.