New Delhi's office leasing volume down 26.5% to 8.3m sq ft in 2020

That is compared to the 5-year average of 11.3m sq ft.

According to Cushman & Wakefield, office space take-up in Delhi NCR recorded a 65% q-o-q rise in Q4 with gross leasing at 2.08 msf on the back of a gradual return of economic activity. With the unprecedented disruption presented by COVID, the annual leasing volume of 8.3 msf in 2020 was down by 26.5% compared to the last 5-year leasing average of 11.3 msf (2015-19).

Term renewals formed a sizable 31.8% share of quarterly leasing in Q4, indicating occupiers’ intention to save on new capex. More market traction is expected as strategies are firmed up in conjunction to an improvement in business sentiment. Despite occupier exits as part of business continuity plans and remote work policies, space demand remained healthy as occupiers were active for relocation/consolidation plans.

Here's more from Cushman & Wakefield:

Noida emerged as strong competition to Gurugram with the former accounting for a 41% share of annual leasing, backed by quality supply additions in the last few quarters. Engineering & manufacturing segment was the biggest demand driver in Q4 with a 33% share in leasing, though IT-BPM led annual leasing with a 32% share.

Managed workspace was the primary form of demand driving the flex space segment in Q4. Net absorption in Q4 was 0.63 msf, with the year closing at 2.2 msf. This indicated a 79% y-o-y decline in net absorption, signifying that despite market activity rebounding to some extent, there was a substantial impact of occupier exits, lease cancellations, delayed decision-making and downsizing of portfolios in the wake of COVID led changes.

Despite the short-term pain, COVID is also giving rise to new business scenarios. For instance, mid-sized coworking players are contemplating assisting occupiers in lease restructuring by themselves becoming the primary lessee and allowing the original occupier to downsize and re-lease the same space to a lesser extent while allowing the coworking operator to lease the remaining space to other firms.

While real estate costs remain a critical component, hub-and-spoke models arising out of de-densification strategies, health and wellness as key parameters in leasing decisions and managed workspace demand fuelling the growth of enterprise coworking models will be key themes defining office demand in the next few quarters.

Robust supply addition in Gurugram and Noida; vacancy levels increase

Q4 recorded supply additions of 2.8 msf with more than half of this coming from the micro-markets of Noida Sector 16B and Golf Course Extension Road, Gurugram. Unoccupied space in the new supply coupled with some exits and downsizing plans led to a q-o-q increase of 126 bps in the city’s vacancy rate which stood at 25.1% at the end of 2020.

Though Grade A projects did not witness any major headline rent reductions, effective rents saw a softening due to changes in earlier agreed rent escalations and restructuring of transactions as developers offered higher rent-free period subject to lock-in commitments. Developers were also more accommodating in cases of term renewals in their attempt to maintain their occupancy levels. Investor-owned inventory in strata-sold projects saw a rental decline with some current furnished space rents only marginally higher than pre-COVID warm shell rents.

Upcoming Grade A projects maintain a healthy pace of construction

Despite COVID disrupting the completion timelines in several cases, Grade A projects in key corridors maintained a healthy construction pace. With deferment in construction schedules this year, Delhi NCR is likely to see new supply addition of around 7.5-8.0 msf in 2021 with close to 60% in Noida led by the Noida Expressway corridor. Golf Course Extension Road and Sohna Road will be key micro-markets in Gurugram driving new supply in 2021.