Mumbai’s office market likely to fare better in Q3 2014

By Anshuman Magazine, CMD – CBRE South Asia Pvt. Ltd.

Following the slow market conditions of the last couple of quarters, Mumbai’s office market saw a slight spurt in market sentiments in the second quarter of 2014. The city’s overall real estate market is anticipated to fare better in the third quarter over the second quarter of the year. Apart from improved sentiments, however, ground realities in the Mumbai commercial office segment are hardly likely to change this year as far as actual investments and project funding are concerned.

Although a gradual recovery is on the cards, office space leasing activity is not expected to move significantly before 2015. The micro-markets of Bandra–Kurla, Lower Parel, and Andheri, are likely to witness a reasonable level of corporate interest. Due to a surplus supply situation, however, rentals are likely to remain stable in this micro-market, and would continue to remain so over the forthcoming quarters too. In line with the overall market, although a gradual recovery is on the cards, office space leasing activity is not expected to move significantly before 2015.

The Central Business District of Nariman Point, Fort and Cuffe Parade saw sluggish transactions during the second quarter of the year. Enquires remained limited to small and medium sized office spaces in some of the prominent commercial developments. Vacancy levels increased marginally owing to shift in occupier interest towards other cost effective micro-markets; while rental values declined by 2–4% on a q-o-q basisowing to subdued demand levels.
Office leasing activity picked up in the Lower Parel office district, with corporate occupiers from the financial services and FMCG sectors driving take-up of mostly small to medium format office spaces. Large supply addition in the quarter led to a marginal increase in vacancy levels in this micro-market. Worli and Prabhadevi also witnessed an increase in leased space during the review period, which was largely a consequence of significant pre-commitment in an IT development in the previous quarters. Despite this increase in office space absorption, overall occupier demand remained largely subdued, leading to a rental correction of about 2–3% on a quarterly basis.

The Bandra-Kurla Complex, Kurla (W) and Kalina, meanwhile, observed the closure of a few large sized transactions in the second quarter, predominantly from the banking/financial services and pharmaceutical industries. Existing vacancy pressures in the area resulted in a rental decline of 2–3% over the previous quarter. Rentals remained stable on a quarterly basis at Andheri, Ville Parle and Jogeshwari, however, the completion of various infrastructure projects propelled demand for office space.

Going forward, demand for corporate office space is likely to be concentrated in the city’s secondary and peripheral markets, owing to the abundant availability of cost-effective Grade A options. Additionally, the completion of key infrastructure projects may help improve demand in certain micro-markets in the medium term. Along with financial institutions and pharmaceutical firms, engineering companies are also likely to lead office space demand in the forthcoming quarters. Rental values are likely to remain range bound across most micro-markets of the city.

More traction is expected from corporate occupiers in the back-office market of Powai and Goregaon to the peripheral locations of Navi Mumbai and Thane in the coming quarters. Limited availability of Grade A options in the Powai/Goregaon micro-market have been diverting occupiers to the emerging locations of Navi Mumbai and Thane, which offers more Grade A options at present, at reasonable rates.

A growing trend in the Mumbai office market has seen occupiers with strong corporate real estate practices proactively engaging with developers and landlords to benefit from the presently prevalent low market rates.Multi-national financial institutions, who typically drive demand in the city’s Grade A office market segment, have been going through a portfolio rationalization exercise in recent times. This has led to the re-structuring of existing lease agreements to take advantage of the prevailing low rates, apart from the release of second generation space as a result of the various consolidation initiatives of corporate office space occupiers in Mumbai.

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