Are residential projects eating into commercial space at Mumbai?

Mumbai, the financial capital of the country, may not be able to house the leading companies as the city’s commercial pipeline is drying up. A rush to convert commercial projects to residential plots has shrunk supply of corporate offices in Mumbai, putting pressure on rents and polarising the rents in different micro markets as a result. “Over the past few years, developers shunned office developments plans in favour of residential developments, which is now reflecting on the decline in new completion,” explained Samantak Das, chief economist and national director at Knight Frank India.

Supply pipeline in the Mumbai market has shrunk from 9.2 million. sq. ft in 2014 to 5.9 million. sq. ft in 2016, a decline of 36%. According to Knight Frank, new supply in the market has dropped by as much as 73% just in the past one year.

In the 2012-13 period, major companies opted out of office projects because the 2008 – 2009 global financial crisis had stripped down expansion plans, leading to a slump in the demand for offices. Developers became sceptical as a result, especially because office buildings can only be monetized once the tenant moves in and begins paying rent, which can take five years on an average.

In sharp contrast, residential plots were then lucrative; pre-sales guaranteed an immediate stream of cash flow.
Fortunes changed for the commercial piece of the real estate sector three years back and it has only grown from strength to strength. A Colliers International report pegged total absorption at over 40 million sq ft, the highest ever achieved in 2016.

The shrinking pipeline of offices in Mumbai has meant a slight dip in vacancy rates. From 21.6% one year back, vacancy rates are now 19.6%. Despite the downward trajectory, 19.6% vacancy is considered far too high, experts said.

There is no doubt Mumbai is losing out to competing markets like Bengaluru, where the overall vacancy rate is as low as 6% and even Pune, where vacancies are at 8.2%. Industry watchers pointed out the Mumbai commercial market has become polarized, with areas like BKC (Bandra Kurla Complex) and Lower Parel commanding a 5% vacancy rate whereas micro markets along the western suburbs struggling to attract tenants.

Low availability of space against high demand in the most sought after office destinations will put pressure on rents in these areas, according to Das. But price appreciation will be limited, said Navin Makhija, managing director at Wadhwa Developers, which owns a commercial building in the main BKC area.

 “Given the general business environment outlook and corporate performance, companies are not willing to pay escalated rents despite the velocity of demand,” Makhija added. It is true that multinational companies such as Apple and Google have picked up space in these areas despite premium rents because the likes of these corporations don’t want to compromise on global standards.

But not all companies have the financial wherewithal of Apple and Google. That companies are price-sensitive when it comes to rents is evident in statistics released by Colliers International, which said, 55% of new leasing in 2016 was seen in Andheri in the Western suburbs and Navi Mumbai, where rents are affordable in comparison to the southern parts of the city. BKC contributed just 12% to the total leasing whereas central suburbs, which includes areas like Lower Parel comprised 16%. “In the IT sector, companies can consider either the suburbs or Pune but there is no replacement as such for corporate headquarters,” Das said.

Inevitably, existing Grade A buildings will see a churn, similar to the one that is being witnessed in the top performing malls. Whether a company will look for other options depends on its convenience, if it is a renewal, companies might prioritize convenience over cost to a certain extent, Makhija added. Overall in the city level, rents are likely to remain stable.

The solution seems simple but over reaching at the moment. MMRDA (Mumbai Metropolitan Region Development Authority) must release fresh supply through an auction. Last year, one commercial plot was awaited but finally, the auction was called off owing to not enough interest at the asking price.

“The funds have deep pockets and enough interest,” said Das. It is natural that companies will not invest in capital intensive projects at the moment because times are tough, it takes time and patient money to break even an office building, according to Makhija.

If there are warning signs this year on the upcoming supply, the next year estimates are alarming. Colliers International anticipates new supply of 3.7 million sq ft last year, almost half the annual demand. “We believe availability of Grade A buildings at affordable rent will remain a concern for the next several years,” the firm said.

Credits The Financial Express

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