Commercial real estate
Over the past few years until 2014, the supply of office real estate was higher than demand by 4 to 10 million sq ft. Our reading is that developer had been too optimistic in their anticipation of a revival in economic activity.
Though office real estate prices failed to recover from the after-effects of the financial crisis up to late 2014, we did see the beginning of a gradual turnaround. This can be attributed to the fact that commercial real estate developers began to strategically reduce the incoming supply to a new-normal level of occupier demand in the range of 27 to 30 million sq. ft. each year. This helped bring down the vacancy rate to 17 per cent from more than 18.5 per cent just a year ago.
In 2015, demand will remain in this range, marginally improving from the level seen in 2014. However, with the rupee weakening to below INR 62/USD at the current time and India's GDP growth likely to strengthen further, the positive risk to this forecast of a sharp uptick in demand cannot be ruled out though.
Interestingly, while office real estate have not recovered fully from the fall in prices post GFC (unlike residential) there is significant room for upside in the event of a positive change in business sentiment. In fact, such an improvement was already seen after the general elections and is already reflecting in year-end office market leases. The trend of moderate-to-healthy leasing activity will continue in 2015.
Pan-India new completions, absorptions and vacancy – office
Retail Real Estate
In 2014, the retail real estate sector was one of the biggest casualties to market conditions that increasingly favoured the online retail community, with the exclusion of well-managed and leasehold organised retail malls. Strata-sold, poorly-managed, badly-located retail properties lost lustre as more retailers chose to avoid them.
2014 also saw a few of these malls either converting into Grade B office space or reeling under the compounding effect of rising vacancy rates. Vacancy in poorly-built and operated malls was as high as 20 per cent, while good quality malls were relatively better off with about 10 per cent of vacant space. The ecommerce frenzy that has been taking India by storm over the last two years was at its peak during 2014, and now poses a serious challenge to physical retailers and mall developers. The situation is compounded by the absence of adequate regulation on ecommerce in India currently.
However, a handful of mall developers have risen to this challenge by identifying key transitions that could help them sail through. The measures they have undertaken include a revamped tenant mix, adoption of the mixed-use format and delivering theme-based shopping experiences. These practices are now common in overseas markets, and Indian retail malls will be seen adapting to them more rapidly in 2015.
