Office rental values increase by 7 percent year-on-year in top seven cities despite tepid leasing in H1 FY24

Office rental values witnessed a 7 percent growth in H1 FY24 across the top seven cities when compared to the same period in FY23.

In H1 FY2024, Grade A office space rental value across the top 7 cities averaged at ₹83 per sq ft per month - up from an average of ₹77.5 per sq ft per month in the corresponding period in FY23. Chennai witnessed the highest 10 percent yearly increase in average office rental values, followed by Hyderabad with an 8 percent yearly growth

Office space (Representational)

Office rental values witnessed a 7 percent growth in H1 FY24 across the top seven cities when compared to the same period in FY23, essentially due to increased construction and input costs. Grade A office rental values averaged at ₹83 per sq. ft. per month across these cities in H1 FY2024, while in the corresponding period in FY23, it was approximately ₹77.5 per sq. ft, according to data shared by ANAROCK Research.

Chennai witnessed the highest 10 percent yearly jump in average monthly office rental values – from ₹62 per sq. ft. in H1 FY2024 to approximately ₹68 per sq. ft. in H1 FY2023. Hyderabad came next with an 8 percent yearly growth. The average monthly office rental value in the city rose from ₹61 per sq. ft. in H1 FY2023 to approximately ₹66 per sq. ft. in H1 FY 2024, it showed.

"The first half of fiscal year 2024 remained lacklustre for commercial office space activity across the top seven cities, with both net absorption and new completions remaining largely stagnant compared to the same period last year. New office supply across the top seven cities rose by a meagre 5 percent in H1 FY2024 against H1 FY23, and net office absorption saw a marginal yearly decline of 1 percent in this period," said Prashant Thakur, Regional Director and Head - Research, ANAROCK Group.

While Indian commercial office space demand doubtlessly faces short-term challenges in the current global environment, the mid-to-long-term outlook remains positive, considering that Grade A offices are still available at sub-dollar rents. Stability in the office market may return from the second half of 2024.

Bengaluru, Pune, and Kolkata each saw 7 percent annual growth in office rental values in this period, while MMR and NCR registered a 5 percent jump each. The average monthly office rental value in Bengaluru stood at ₹90 per sq. ft. in H1 FY2024, against ₹84 per sq. ft. in H1 FY2023. In Pune, the average office rental value stood at ₹74 per sq. ft. in H1 FY2023 while in H1 FY2024, it was ₹79 per sq. ft.

Kolkata saw a 7 percent yearly rise in average monthly office rental value in H1 FY24, reaching ₹58 per sq. ft. compared to 54 per sq. ft. in H1 FY2023. The city currently has the most economical office rental values among the top seven cities.

MMR, the most expensive office market in the country, saw monthly average office rental values jump from ₹130 per sq. ft. in H1 FY 2023 to ₹136 per sq. ft. in H1 FY2024. In NCR, the average office rental value stood at ₹81 per sq. ft. in H1 FY2023 while in H1 FY2024, it stands at ₹85 per sq. ft.

“It was widely anticipated that commercial office space demand in India will see a downturn amid layoffs by several large corporations worldwide, and shrinking business volumes," says Thakur. "However, despite all headwinds, office activity remained largely unchanged in the first half of FY 2024 as compared to the corresponding period in FY 2023. New completions saw a meagre 5 percent yearly jump in the period and net absorption dropped by just 1 percent.”

IT/ITeS continues to dominate leasing transactions

In terms of sector-wise net absorption, IT/ITeS continues to dominate leasing transactions in H1 FY2024. However, the sector’s overall share in leasing has been on a decline year-on-year. In H1 FY2020, the share of IT/ITeS sector in overall leasing was a whopping 46 percent, while in H1 FY2024, its share dropped to just 29 percent.

Consequently, the share of coworking spaces has been on the rise – from 11 percent in H1 FY2020 to 24 percent in H1FY2024. This denotes a shift in the leasing trend by many corporates of various sizes who now see flexible workspaces as a viable and more cost-effective option, the Anarock data showed.

Vacancy levels increase marginally

Amid increased office space completions, vacancy levels across most top cities rose marginally except in NCR, MMR, and Kolkata. The average vacancy rate of Grade-A offices in the top 7 cities collectively increased by 0.95 percent - from 15.9 percent in H1 FY23 to 16.85 percent in H1 FY24. An analysis of annual variations in average vacancy rates shows that Pune currently has the lowest at 8.3 percent.

NCR, MMR, and Kolkata witnessed a Y-o-Y reduction in vacancy levels with 0.8 percent, 0.45 percent, and 0.1 percent, respectively. Chennai maintained equilibrium in its vacancy rates throughout the period. In Pune, Bengaluru, and Hyderabad, office space vacancy levels increased by 0.5 percent, 0.5 percent, and 2.6 percent, respectively over the course of the financial year, the data showed.