A surge in demand, including from MNCs looking to establish or expand R&D and engineering centres, has left developers scrambling to supply quality office space in time. Some say rental costs in certain areas and properties have increased by 50% in the past two years.
It is estimated that only about 3.4% of space in existing buildings is vacant as of June end. A stable market typically has a vacancy of 10%. Much of the space in many projects that are underway have also been committed. This is a continuation of the trend that was seen last year, when Bengaluru recorded its highest office leasing activity of about 14 million sqft. The city has a total stock of 96 million sqft of Grade-A (top quality) office space today.
“We set up RMZ Ecoworld in 2012 with 7.5 mn sq ft of space. Out of that, 3 mn sqft has already been occupied, and almost 4 mn has been committed,” Thirumal Govindraj, MD of leasing in RMZ Corp, one of the biggest owners of office spaces in southern India, told TOI. To meet demand, the company is setting up an additional 2 mn sqft of space in the same area to be delivered by 2018.
Independent property consultancy JLL estimates there will be demand for 10 mn sq ft of non-captive (a project that’s not built exclusively for one company) office space this year, but the supply will be only 8-8.5 mn sqft. About 4 mn sq ft were leased out in just the first quarter of this year. About 40 mn sqft of office space is in different stages of planning and construction, supply of which is expected to come up in the next five years.
Govindraj said demand for office spaces in Bengaluru used to be mainly from IT/ITeS companies, but in the last few years, financial services companies have ramped up their presence. US-based banks such as JP Morgan, Morgan Stanley, State Street, one of the biggest custody banks in the world, Wells Fargo and Northern Trust Bank have significant back office presence in the city.
Exxon Mobil established a big business and technical support centre last year. A host of retailers including Walmart, Victoria’s Secret, Lowe’s and JC Penney have entered with big centres over the past two years. Amazon and Flipkart have expanded rapidly.
JLL notes that 2015 was a historic year as demand overtook supply. “Riding on the back of reducing supply and lowering vacancy, rents have also been rising in grade-A properties across cities. Even Grade-B buildings in good locations would see more leasing activity in this scenario,” the consultancy said in a report.
Govindraj says rents in Ecoworld have gone up to about Rs 74 per sq ft per month, compared to Rs 54 a year ago. Average rent for Grade A office space on Outer Ring Road, where Ecoworld is located, was Rs 64 in the first quarter ended March, a rise of 10% from the previous year, according to property consultancy CBRE.
“MNCs have started pre-committing office spaces owing to dearth of readily available quality office space in key suburban locations and Outer Ring Road. This has pushed rentals north, with an average year-on-year appreciation of 10% in key suburban locations,” said Bhavesh Kamdar, head-leasing of Embassy Office Parks, another of South India’s big commercial real estate players.
Shamsher Singh Sindhu, India chapter vice chair of CoreNet Global, an association for corporate real estate professionals, said Outer Ring Road is almost stacked up and people are hesitant to move to Whitefield due to the upcoming metro. “There is still sizable space available in Electronics City phase II but the problem there is the immense travel time,” he said.
Juggy Marwaha, south India MD of JLL said if developers do not start building office space soon, there is a chance the demand will move to other cities.
Credits ET Realty