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Commercial realty supply may exceed demand in near term

Covid-19 has put a break on demand for commercial realty which had touched an all-time high in 2019. Outbreak of Covid-19 in 2020 and the present second wave have changed the course altogether with developers now seeing the demand revival only from next calendar year.

In the near term supply is likely to outstrip the demand as several leasing decisions have been withheld by the leading corporates due to prevailing uncertainty over business prospects. This has resulted in a spike in the vacancy level. Many tenants with lease agreements which are approaching expiry are relocating to areas with lower rents – a trend seen mainly in NCR where occupiers moving to locations such as Golf Course Extension Road in Gurugram.

However, next year is likely to be better as the absorption will be aided by healthy pre-commitments. According to some reports, roughly a third of the expected supply in CY21 is already pre-leased. In fact, in Hyderabad, more than half of the upcoming supply is already pre-committed. The pre-commitment activity is concentrated in micro-markets with low vacancy levels such as Electronic City in Bengaluru, and HITEC City and Gachibowli in Hyderabad.

In the medium term, about 117msf of incremental commercial space is expected to be commissioned by calendar year 2023. NCR followed by the tech-dominated cities of Bengaluru and Hyderabad are relatively well placed as far as the demand-supply equation is concerned.

However, some of the upcoming supply is likely to be deferred due to labour/finance unavailability issues, or even developers themselves choosing to defer projects in light of muted market sentiment.

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