MUMBAI: Decline in supply of additional office space is likely to put pressure on rental values in the coming quarters, even as the demand is expected to be moderate, industry experts say.
According to a report, less than 3 million sq ft of office space was added in July-September quarter, which is a decline of nearly 50% compared to the same period in 2012, and 75% compared to April-June quarter of 2013.
"Owing to a slowdown in construction activity, pent up supply has been lined up across various micro-markets for release over the next 6-9 months, which might result in pressures on asset pricing," CBRE South Asia Chairman and Managing Director Anshuman Magazine said.
The demand for office space is likely to moderate or even be low in certain cities, mainly because corporates are now focusing on consolidation and relocation to quality locations with lower rentals.
In Q3 2013, relocation and consolidation were primary demand generators for commercial office space, global consultancy firm Colliers International said in a report.
During the quarter, six major cities - Mumbai, Delhi NCR, Bengaluru, Chennai, Kolkata and Pune recorded a cumulative rental space absorption of 6.2 million sq ft, which is 20% less than 8 million sq ft year-ago.
"The decreasing demand is a reflection of the prevailing low business and investor confidence. Due to the slowdown in the economy and the political uncertainty in the country, companies are deferring their decision to take up real estate," Colliers' Head of Research Amit Oberoi said.
"Also a significantly large percentage of the uptake for office space is being generated due to companies relocating or consolidating their operations to a single larger but cheaper location," he said.
According to Colliers, while Mumbai commercial market recorded absorption of around 6.5 lakh sq ft of Grade A office space, only a few mid-sized deals were concluded in Delhi resulting in 1.5 lakh sq ft of Grade A office space absorption during the quarter.
During the quarter, absorption in Gurgaon was around 1.6 million sq ft, while Noida witnessed an absorption of 4 lakh sq ft, which was primarily from IT/ITeS sector followed by banking and financial services sector.
The Chennai commercial market witnessed increased demand this quarter with overall absorption of Grade A office space about 1.68 million sq ft.
However, Bengaluru market saw a weak demand this quarter with nearly one million sq ft of office space being absorbed, which is significantly less than the previous two quarters absorption of 2.9 and 2.7 million sq ft, the report said.
Kolkata's office market remained sluggish due to the overall negative economic scenario and recorded absorption of nearly 2 lakh sq ft, while steady occupier demand from the IT/ITeS sector kept Pune's office market steady during 3Q 2013 as the absorption in the city stood at 8.5 lakh sq ft.
"The economic environment is expected to remain uncertain due to overall uncertainties and upcoming elections in 2014. We anticipate moderate leasing demand across the cities in next coming quarters.
"In spite of moderate demand, rental values are expected to remain stable due to limited supply as developers deferring completion of their projects and refrained from adding more speculative supply in the market," Oberoi added.