Robust demand for office spaces to give occupancies a leg-up
Source: Live Mint
Grade-A office spaces are seeing a drop in vacancy levels, along with improving occupancies, as the leasing trajectory is likely to maintain the good run in the March quarter (Q4FY25), too.
Demand for commercial properties continues to be led by global capability centres (GCCs), rising traction in flexible workspaces, and IT/ITes. Plus, the floor-wise denotification and consequent leasing of special economic zones has also helped drive confidence among listed real estate investment trusts (REITs).
“Vacancies at all key REIT micro-markets—Outer Ring Road (Bengaluru), Madhapur (Hyderabad), Thane Belapur (Mumbai Metropolitan Region), and Cyber City (Gurugram)—have gone down over the last couple of quarters. This is also reflected in the leasing performance of all the REITs, which have witnessed 200-500 basis points improvement in occupancy in 9MFY25,” said a JM Financial Institutional Securities report dated 12 March.
This could mean listed REITs will meet their FY25 leasing and occupancy targets.
Embassy Office Parks REIT’s commercial portfolio occupancy was at 87% in Q3FY25, and it expects the measure to be 88% by March. Peer Brookfield India Real Estate Trust’s committed occupancy in Q3FY25 stood at 87% and could reach 89% by March. For Mindspace, committed occupancy stood strong at 91% in Q3FY25 and is expected to touch 92.5%-92.9% by FY25-end. The committed occupancy rate includes properties whose leases have already been signed with tenants but whose leases have yet to commence.
The IT factor
Given upbeat business prospects, REITs are in an expansion mode. For instance, Embassy and Mindspace are expanding their portfolios by 7.4 million square feet and around 8 million square feet, respectively. Plus, these companies are also trying to diversify their tenant base to lower dependence on top clients.
So far, so good. Hereon, a key monitorable would be hiring trends in the IT sector—once a large contributor to office leasing demand, but has been battling sector slowdown lately. “Tier-1 IT companies reduced 6,000 employees (net) in Q3FY25, a reversal from the net increase of 17,000 employees in Q2FY25. However, the reduction was much lower than earlier (15,800 average quarterly reductions in the six quarters from Q4FY23 to Q1FY25),” said Kotak Institutional Equities.
That said, utilization of IT employees remains healthy at 83-86% in Q3FY25, and a continued push by large IT employers toward ‘return-to-office’, citing efficiency concerns, would further support the demand,” added the Kotak report dated 5 March.
Notably, a muted supply of new office spaces in 2024 also helped vacancies drop. However, once new supply starts coming in, its impact on office rentals, vacancies, and occupancies would be critical.
