After a gloomy FY24, office absorption may see mild growth in FY25: ICRA

Bengaluru: Owing to a slowdown in office leasing from technology-based sectors, net absorption across the top-six cities is estimated to decline by 19-20% to approximately 47-48 million square feet in financial year 2023-24, credit rating agency ICRA said in a note on Thursday.  The company also projected a mild 4-5% growth in net absorption of office space during FY25. 

This slowdown will result in a marginal increase in vacancy levels to 16-16.2% during the period under review, from 15.5% in FY23. This will result from fresh office space supply to the tune of 60-62 million square feet each in FY24 and FY25.

The Indian information technology sector is battling a slowdown owing to global macroeconomic headwinds, leading to the said impact seen in the commercial real estate segment. Furthermore, employees at a majority of the technology companies are yet to return to office in full capacity. 

Amongst the top-6 cities, Bengaluru - the Silicon Valley of India - is likely to witness a relatively bigger hit in the office segment, Magicbricks Chief Executive Officer Sudhir Pai, observed. “Most of the IT majors have gone slow on adding net headcount in 2023, which will clearly play out in terms of space requirements,” he explained.

Pai also attested to a softening in demand for commercial properties on Magicbricks, alongside an uptick in queries for small retail outlets, in the last six months.

Vimal Nadar, who helms research at property consultancy Colliers, is optimistic on the India office market. While Bengaluru registered a marginal dip in gross leasing in the 2023 calendar, the overall office market is on an upward growth trajectory, he said. Furthermore, even with the January-March quarter being a traditionally slower quarter, a significant decline is unlikely, Nadar stressed. 

Despite the diversity in views, a healthy growth in other sub-segments, such as retail and warehousing, have kept the boat afloat. ICRA expects rental income for mall operators to increase 9-10% year-on-year in FY24, and a mildly lower 8-9% growth in FY25. Healthy occupancy levels and trading value which have driven a healthy growth for malls in India are likely to continue going forward. Across the top six cities in the country, fresh supply of 9-10 msf and around 6 msf is expected in FY24 and FY25, respectively.

Furthermore, the supply of  grade A warehouses is estimated to  witness an increase of 15-16% year-on-year in FY25, from a projected calculation of 195 msf in FY2024, ICRA said.

“Favourable demographics, a highly skilled and cost-effective talent pool, availability of high-quality office spaces at competitive rentals, would continue to drive demand for the Indian office portfolio in the medium to long-term,” Anupama Reddy, who is the vice president and co-group head at ICRA (corporate ratings), underscored.