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Demand for commercial realty drops in Q1

Calendar 2021 started with a pessimistic fervour for commercial realty as the demand slumped 44% QoQ basis during the first quarter of the year as the pandemic put brakes on the uptick seen in the previous quarter. Further, supply too declined by 14% during the quarter as compared to previous quarter which pushed up the absorption ratio during the quarter.

During the first quarter of 2021, while office space demand decreased to 3.6msf (a fall of 47% YoY), supply stood at 10.9msf which was down 14% QoQ, up 8% YoY. Southern cities of Bengaluru and Hyderabad generated the bulk of demand during the quarter. Except Chennai, Pune and Kolkata, vacancies rose QoQ basis across the country. Tech-dominated markets such as Bengaluru and Pune still enjoy single digit vacancies. While headline rentals were broadly flat, developers gave concessions in the form of lower CAM charges/higher rent-free period.

The re-emergence of Covid-19 cases that has touched all-time highs has dashed the hopes of early revival of the market, at least in the near future. The rising number of cases is likely to delay the return of employees to offices; this may push occupiers to defer leasing decisions. A leading property consultant expects demand and supply in CY21 to be 30msf and 38msf, respectively; hence vacancies will continue to rise and rentals will remain soft. While 32% of the supply in CY21 is already pre-committed, fresh leasing trajectory hinges on the pandemic’s trajectory hereon.

Meanwhile, consolidation in the office space in favour of financially strong developers is helping them gain market shares and the ongoing crisis will only accelerate this process. While supply will eclipse demand in the near term which is to likely put pressure on rentals, supply deferment will ensure that the demand-supply mismatch does not get out of hand over the medium term.

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