Premium office spaces in short supply vis-a-vis demand

About a month ago, pharmaceutical major Abbott India purchased 4.35 lakh square feet of commercial space from Godrej Properties in Mumbai’s swanky Bandra Kurla Complex at a whopping price rate of Rs 34,000 per square feet, much above the average Rs 28,000-29,000 per square feet that the area commands. The pricey deal hogged headlines and raised several debates over what this might signal for the once-tumbling office real estate market.
As the dust settles, the one thing that has emerged loud and clear is that the deal was not an anomaly. Experts say, it was more a manifestation of the kind of premium that big companies are willing to pay for good quality office space, something that is in short supply, especially in Mumbai even as the inventory remains high.
After Mumbai, the problem is the most acute in Delhi and the National Capital Region, while Bengaluru has the lowest inventory pile up and the best equilibrium of demand and supply among the country’s metropolitan cities.

Samantak Das, chief economist and national director, research, at Knight Frank India, said, “Across India, if you look at the supply and demand, there is dearth of good quality, Grade A supply. Over the next 12-18 months, there is not enough of quality supply getting completed and expected to hit the market. International players are looking for it, and brokers are finding it difficult to offer it to them.”

He added that the Godrej-Abbott deal rings in a lesson for stakeholders that if they provide value in a project, there are people ready to buy and offer a good price.

As per data from Knight Frank, as of June, Mumbai’s office market had a vacant stock of 25 million square feet, about 22 percent of the total stock of 114 million square feet. Even as there is an inventory pile-up, experts say there has been a spurt in demand, especially from sectors such as banking and finance, Information Technology and related services, and e-commerce, among others.

A good quality or a Grade A office space refers to space in a modern, newly-constructed building with an opulent ambiance of the building and its surroundings, ample car parking, hospitality that ensures excellent maintenance and various additional features and facilities. Owners of Grade A office spaces also ensure that a minimum floor plate is maintained while leasing out office spaces to help define and maintain a client demographic of the building.

Pankaj Kapoor, managing director of real estate research firm Liases Foras, said, “It is also the client’s profile that defines the quality of the building. All of Bandra Kurla Complex, for instance, is Grade A supply. The B or C grade offices are slightly older buildings, devoid of any additional features and surrounding ambiance.”

Kapoor attributes the shortage of such Grade A office supply to a glut in the commercial real estate market between 2006 and 2008 leading to a slump, especially after the global economic downturn, followed by the moderation of prices and now signs of revival.

“Post 2008, new supply of office spaces stopped hitting the market, and high prices coerced the sector into a slump. Of late, the inventory has been depleting and prices have moderated. There is an uptick now because commercial real estate has been through time and cost correction.

However, for the past five years there have been no new launches in Mumbai, and as a result, no new Grade A supply,” he said, adding that all fresh properties hitting the market are actually old projects that are being completed now after much delay.

According to statistics by Jones Lang LaSalle (JLL), only about 17 percent of the total office spaces supply likely to be completed in Mumbai between 2017 and 2019 will be Grade A, coming up in the core business districts of Bandra Kurla Complex and secondary business districts in central Mumbai. Of the total 14 million square feet that is expected to hit the market in Mumbai, 2.37 million square feet is likely to be Grade A, according to the real estate services firm.

“Interestingly, the expected demand for office spaces in these two areas in the same period will stand around 5 million square feet and is expected to grow beyond 2019,” Ashutosh Limaye, JLL’s national director for research noted on the consultancy’s blog.

“The biggest shortfall of Grade A office spaces is being felt in Mumbai. There is supply, but not relevant supply at the right place and the right type. Most of the supply is in Mumbai’s peripheral areas, projects that developers had launched 5-6 years ago when commercial real estate was on an upwards trend and are now getting completed. Businesses are not interested in going there now,” Limaye said.

Article sourced

Leave a Reply

Your email address will not be published. Required fields are marked *