HomeNewsSupply overhang is a cause of worry for commercial real estate

Supply overhang is a cause of worry for commercial real estate

Unlike residential segment, India’s commercial real estate segment may not have smooth sailing post Covid-19, reveals a research study conducted by Edelweiss Securities. While practice of ‘Work from Home’ has already sown seeds of uncertainty on future demand, upcoming supply in the industry may add to the segment’s cup of woes.

“India’s commercial realty cycle wallowed in an upswing post-CY13 with vacancies decreasing from 19.7% to 13.2% by CY19-end. And then covid-19 threw a spanner in the works: it infected demand, which has now been lagging supply for the past five quarters. Vacancies thus rose to 16.6% by end-H1CY2,” says the report.

Indeed, near-term demand would remain weak due to the pandemic. But a bigger worry, the report says, is the upcoming supply over the next two and half years marked a mere 4% YoY contraction in Q2CY21. Despite the second wave, average quarterly completions during H1CY21 were still higher than the average quarterly supply over CY15–19. Bengaluru and the NCR are in fact likely to deal with higher upcoming supply. This indicates developers are planning to bring in more projects despite weak demand. “Whether it would be absorbed is a moot point,” says the report.

In case demand continues to be soft over the medium term, higher office supply can push up vacancy rates and pressure rentals. “The long term is a more nuanced story: bespoke hybrid models would gain dominance in our view—work from home (WFH) will sustain, but offices won’t become obsolete either,” said the report.

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