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Developers stare at vacant office spaces

Shubhra Tandon, Mumbai, Financial Express

August 04, 2011


Around 60 million sq ft of office space is likely to remain vacant this year across the country as fresh supply enters the market, according to a report by property consultant Jones Lang LaSalle.

In Mumbai alone, around 80 million sq ft of commercial real estate will be ready for occupation by December this year, the report says, adding that as much as a fourth may not find takers as the economy slows.

Not surprisingly, rentals of R500 per sq ft at the peak of the real estate boom before the collapse of Lehman Brothers in 2008, have come off by nearly 40%. The upmarket Indiabulls Finance Centre at Lower Parel in central Mumbai charges an estimated R150-160 per sq ft. Cushman & Wakefield points out that rentals were over R300 in Lower Parel in 2008.

“In Mumbai and Delhi & NCR, demand for corporate leases is slowing,” confirms Vinod Rohira, director, K Raheja Corp. It’s not surprising that of the total 67 million sq ft of Grade A office space in Mumbai, about a fifth is vacant. According to industry estimates, 18-24 million sq ft of office space is complete or near-complete in western suburbs like Andheri, but takers are few.

Escorts Group is taking up 6 lakh sq ft space in Times Square and JP Morgan Chase will occupy 3.25 lakh sq ft space in L&T Tower I while Yes Bank will occupy 4.75 lakh sq ft space in Indiabulls Finance Centre Tower 2 by the third quarter of this financial year.

Transactions are few and far between; Johnson & Johnson leased out space in Oberoi Commerz 1 earlier this year, while Edelweiss Broking picked up over 2 lakh sq ft in the 14-storey building and Lotus Midtown in Kalina in western suburbs.

Demand calculations by developers have gone awry with the global recovery taking longer than expected and the Indian economy slowing down. So, while Barclays rented space in the posh Ceejay House in Worli at a reported R725 per sq ft in 2008, market sources say space in the building is now available at R350 per sq ft. With the broking industry downsizing, there’s less demand from this segment and in general, BFSI space in general has not materialised to the extent envisaged.

Cushman & Wakefield says that rentals in Nariman Point are around R300 per sq ft per month, down from R500 in middle of 2008. Over the last five years, the vacancies have risen from 5% in 2007 to 18% in 2010 and could hit 23% by end-2012, says the JLL report.

“In 2007-2008, demand for office space was outpacing supply across sectors like BFSI, pharmaceuticals and information technology. However, many information technology and BFSI players failed to set to shop as anticipated,” says Ramesh Nair, managing director, western region, JLL.

Adds Niranjan Hiranandani, managing director, Hiranandani Group: “There is a slight supply and demand mismatch currently because the demand, across sectors, has not picked up proportionately.”