Demand for office space has risen significantly amid greater activity even as average deal size has reduced, according to experts.
In the second quarter of 2023, the number of deals closed increased to 414, as compared with 258 over the same period last year. There has been a total of 747 transactions during the first half of the calendar year, as against 554 in H1 2022, as shown by data from Knight Frank.
This was led by a rise in quarterly transaction volume, which grew 31% on a sequential basis in Q2 2023, but remained flat on a yearly basis.
Transactions for office spaces in the April-June period, which totaled 14.8 million sq ft, represent the highest quarterly figure recorded since Q1 2021.
"There is a noticeable increase in the demand for high quality office spaces, commonly referred to as 'Grade A' office spaces, as both multinational corporations and domestic companies are increasingly favouring modern office environments, over traditional setups," said Mukul Sharma, head of corporate leasing at Advance India Projects Ltd.
Transaction volume in Chennai grew the most during the first half of the year, on the back of large transactions. This was followed by the National Capital Region and Bengaluru.
"Cities like Gurugram, Bangalore, Chennai, and others are witnessing a strong demand for Grade A office spaces that exceeds the current supply," said Sharma.
Momentum in Q2 was stronger than Q1 amid greater activity as compared with earlier market expectations of it weakening due to possible recession in the U.S. and European economies. It improved because of variables which were not interlinked directly with those economies, said Vivek Rathi, director of research at Knight Frank India Pvt.
India-facing businesses drove the office market during the period, followed by flex spaces and global capability centres. However, share of the third-party IT services diminished due to global economic uncertainty.
“Despite the continuation of hybrid work model, mainly in the IT sector, the emergence of office space requirements from other sectors and expansion by the flexible spaces sector has been instrumental for the upward growth trajectory of the office market,” said Rathi.
Even as both the number of deals and volume of demand have risen, the average deal size of such spaces has reduced by 32% year-on-year during the January-June period to about 31,400 square feet.
“Number of deals have gone up by a greater margin than the total volume, which is why the deal size is coming down ... India-facing business are active in taking quality and relatively smaller spaces ... compared to the outsourcing companies,” said Rathi.
The size of larger deals is getting bigger, and at the same time, deal activities are also increasing. However, deal size at the market level has come down. “Is it bad? Not necessarily, because of the changing profile of the market," said Rathi.
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