Around 6.5m sq ft of new Grade A office space expected in Mumbai this year

This is if construction activity is not slowed down by further restrictions.

Net absorption in Mumbai’s office market almost doubled q-o-q to 1.88 million sq ft in the final quarter of 2021. According to JLL, demand was driven by the BFSI, consultancy businesses, IT/ITeS and manufacturing/industrial sectors. 

“Take-up by co-working operators was also observed in the quarter, in line with a growing demand for managed workspaces. Net absorption was still lower than the pre-COVID-19 level of 1Q20 by 13%,” JLL adds.

Here’s more from JLL:

West Suburbs saw the highest leasing activity aided by new completions, followed by SBD North and Navi Mumbai. The city saw the highest number of deals in the peripheral submarkets, as occupiers looked at the hub-and-spoke model for employee flexibility while also reducing real estate costs by moving to more affordable corridors. A few large deals were also seen in BKC during the quarter.

Quarterly supply addition of 1.68 million sq ft

Construction continued to operate at optimum capacity as COVID-19 remained under control. Three projects were completed in 4Q21: Nirlon Knowledge Park, Phase 5 B9-B10 (1 .15 million sq ft) in West Suburbs; Kohinoor Square – The Chambers (0.2 million sq ft) in SBD Central and Kashish IT Park Lower Floors (0.12 million sq ft). The supply influx pushed the city’s Grade A stock to 143.7 million sq ft.

A relatively higher quarterly net absorption compared to supply additions in 4Q21 resulted in vacancy declining by 40 bps q-o-q to 15.6%.

Rents and capital values increase marginally

Overall city rents rose marginally in 4Q21. Rents, however, remained soft in SBD North and Navi Mumbai where vacancy levels were high and assets were of comparatively lesser grade. Capital values rose at a faster rate in the BKC and Western Suburbs submarkets compared to others, as they both are home to high-quality, well-leased assets. Yield compression was also visible in 4Q21.

Occupiers continued to optimise their real estate costs by renegotiating rents, portfolio rationalisation and relocating to projects with lower rents. In most cases, landlords did not reduce rents but adopted strategies like the extend-and-blend model (early renewals without rent escalations), extended rent-free periods, and offered to bear the fit-out capex for occupiers.

Outlook: Supply to outstrip demand in the near term

Supply of 6.5 million sq ft is expected to come online in 2022. However, if restrictions due to Omicron are imposed, the pace of construction activity is likely to be impeded while also impacting leasing activity momentum. We may see demand grow for flex space as occupiers look to save fit-out capex and also have on-demand spaces that fit their hub-and-spoke model.

Demand is expected to be driven by medical technology, health analytics, online education, data centres, gaming, pharma and FMCG sectors. Through the first half of 2022, we expect the supply to outpace demand, causing vacancy levels to rise. Capital values are expected to rise faster than rents due to rising investor interest, leading to yield compression in key submarkets.

Note: Mumbai Offices refers to Mumbai's overall Grade A market.