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Supply squeeze pushes up office rent

business Updated: Apr 18, 2007 00:05 IST

Amid signs that the residential property markets are flattening out, office rents have continued moving up in recent months because of the severe shortage of prime commercial space.

Estimates of the rise in office rents vary in the 15-20 per cent range over the last six months. Predictably the information technology sector has been the major driver in lease rentals. A survey by broking house CB Richard Ellis estimated that infotech companies accounted for 80 per cent of the offtake.

Financial institutions like BNP Paribas, Delta Capital Management and UTI Bank have also been among the major deals in Mumbai and Delhi.

The severe shortage of ‘A’ grade office space has led to developers and companies entering into pre-lease agreements, sometimes even before construction starts. Banks like Barclays and Credit Suisse have been fuelling such deals as they move from scattered office spaces to consolidated headquarters.

In Mumbai, lease rentals in prime areas like Nariman Point and Worli have seen deals in excess of Rs 400 per square feet per month. The Richard Ellis report says the lack of good quality commercial space in the traditional business areas has pushed up rentals in the emerging districts of Parel and Bandra-Kurla Complex and even Andheri East.

The pressure on premium space was so high that in rentals quoted in central Mumbai’s Ceejay House had exceeded Rs 425 per sq ft. These included N M Rothschild taking up 6,000 sq ft and an Irish financial institution 3,500 sq ft, both at Ceejay House.

The pointers for commercial property can be seen from the fact that the reserve price for three plots coming up for auction in the Bandra-Kurla Complex has been fixed by the Mumbai Metropolitan Region Development Authority (MMRDA) at nearly double the level it was during last year’s auction.

In Delhi, the situation was marginally better with higher supply available in the outer business areas located in Noida and Gurgaon, and with companies preferring to move out of the central business areas like Connaught Place to secondary locations.

Office space supply is expected to be strong in Jasola as well as Saket and Bhikaji Cama Place. Dwarka, with several sites going under the hammer, is also expected to emerge with new supply by the end of the year. Significant deals reported by Richard Ellis in these areas include NEC, Porsche, Maersk and Texas Instruments.

Delhi’s master plan, which is expected to allow mixed land use in residential areas and, therefore, conversion of old residential buildings to commercial, will also increase office space supply.

Bangalore saw hectic activity with as much as 13 million sq ft of office space absorbed through 2006. While there was no new supply in the central business areas like Murphy Road, in outer areas like Whitefield, where over 5 million sq ft is expected to hit the market, rents have eased.