Investment-grade office space demand slowed down in the first quarter of 2015, with around 6.3 million sqft of Grade an office space getting absorbed across leading cities of the country. Transaction activity was dominated by the National Capital Region (NCR), Bangalore and Chennai. Special Economic Zone (SEZ) developments in Gurgaon, Bangalore, Hyderabad and Pune also saw traction during Q1 2015. The market saw slow transaction activity and a low level of new completions in the first quarter; and leading cities continued to experience caution from corporate occupiers in the first three months of the year. Most investments by PE groups in the sector during the period were structured debt deals, with a preference for residential projects or well-leased commercial projects. Land and/or development sites for residential and mixed-use projects in the peripheral locations of leading cities also attracted investor attention.
Since business sentiment had recovered slightly towards the end of 2015, it is expected to improve further following the General Elections results. Market demand is likely to pick up gradually. Occupiers will remain focused on optimal space utilization and cost savings. Peripheral and decentralized locations such as the NCR's Gurgaon and Bangalore's Whitefield will continue to experience strong demand. Office space occupiers from selected sectors such as IT/ITeS will cautiously expand, but only in small to medium sized spaces. Larger size requirements will likely remain limited to a few back-office expansions and consolidations alone.
Occupiers in the IT/ITeS, financial services, engineering, manufacturing, telecommunications and pharmaceuticals sectors will drive office demand. Back office space will continue to see high demand, while front office take-up will remain comparatively limited. The bulk of leasing activity will likely take place in peripheral and secondary locations—such as Gurgaon in the NCR, Whitefield and the Outer Ring Road in Bangalore, Lower Parel in Mumbai, and the secondary business districts of Chennai and Hyderabad. Significant supply of fresh office space expected to reach completion in the coming months is likely to push up vacancy levels, however, keeping rental values range bound.
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