A Bleak Future of Commercial Real Estate

Bangalore: The commercial real estate market is standing on a soft ground as the absorption rate for office space in Indian metros is dropping drastically. Due to volatile economic condition, the absorption of office space is dropping 12 percent quarter-on-quarters in the metro cities, in the period of January-March 2012, reports Sobia Khan & Lison Joseph, ET Bureau.

Whereas, in the current year 2012, the absorption rate of office space is likely to drop by 10-15 percent, because of less demand from the information technology (IT/ITES) sector. Due to tight IT budgets and increased costs, the demand from IT/ITES sector is dropping constantly, currently the demand from these sectors has fallen down to 35 percent from a peak of 68 percent in 2005.

Rohit Kumar, head of research, DTZ India, a real estate consultancy firm stated that "Things are not as rosy as they were in 2010. Most corporates are adopting a 'wait-and-watch' policy. The majority of demand in the first half of 2012 was spillover of work-in-progress deals from 2011. The demand thereafter will be influenced by the Indian economic performance and outlook of global markets," reports Economic Times.

According to a recent report by DTZ India, “Total commercial office space absorption for Q1 of this year was 7.4 million square feet, representing a decrease of 12 percent q-o-q and 15 percent y-o-y. Vacancies across cities are expected to rise in 2013, except Bangalore."

Surprisingly, the demand for Grade A office space mainly comes from U.S and European Union, which contributes a larger amount in the country’s commercial real estate market. Infact, U.S. based firms are the major clients for office space across the country contributing 48 percent of the total office space. However, on the contrary Indian tech giants like Infosys and Wipro have been weak players in the commercial real estate market.

According to Sridhar Raghavendra, founder of FM Zone India, a real estate and facility management firm representing IT/ITes firms, said that "There has been no escalation in realty budget as companies look to reduce operating costs. IT/ITES firms have reduced their real estate budget by 5-8 percent this year as they wait for renewal of contract from clients before they can take on additional floor space," reports Economic Times.

Some prominent companies are seeking to acquire large space but waiting to sign deals. These companies are Intel (120,000 sq ft), Juniper Networks (500,000-700,000 sq ft), Cyprus (200,000), Eurospace (300,000-500,000 sq ft) and Volvo (700,000 sq ft).

Naveen Nandwani, director of property consulting firm Cushman & Wakefield at Bangalore quoted that "There are some larger commercial space requirements floating in the market, but no deals have concluded so far. Decision making by corporates have slowed down since fourth quarter of last year. Companies are also staggering occupancy time line and do not want to occupy large space at one go."