Mint Explainer: Will the tech sector drag down office leasing in 2023?

The January-March period

Net absorption of office space in the top seven cities decreased to a six-quarter low of 7.63 million sq ft owing to reduced expansion activity, delayed plans, and a hybrid workplace strategy that is still evolving, property advisory JLL India said. Net absorption, which means new lease deals minus vacated space, saw a 34% year-on-year fall in the March quarter and a 4.5% dip on a sequential basis.

Companies have been consolidating and relocating to save on real estate costs, and there were fewer pre-commitments in new completions during the quarter. This reflects the challenges faced by the corporate world amid global headwinds and an uncertain business environment.

As per the JLL report, 9.96 million sq ft of new completions (of office space) was recorded, which is a decrease of 32.8% from the previous quarter and a 51.1% fall year-on-year. Only 21% of the new supply had already been committed, which reflects the uncertain and bearish business environment.

What to expect in 2023

Real estate analysts are somewhat divided in their outlook on office leasing this year but are unanimous that uncertainty continues to loom over the sector amid a global slowdown.

“Unless something goes drastically wrong, we are expecting 36-38 million sq ft of net leasing in 2023, which is in sync with average leasing between 2016 and 2022. However, if the tech sector took up space actively, we would have expected net leasing to exceed 40 million sq ft. The US is a huge contributor to tech activity in India, so we won’t be able to say with certainty what transpires going forward,” said Dr. Samantak Das, chief economist and head of research and REIS, India, JLL.

During 2023, a relative slowdown is expected in overall traction, especially from the tech sector, due to slow hiring and ongoing layoffs triggered by slower external demand, a Colliers-Ficci report said in March. The leasing share of these companies already saw a slight dip in 2022, and it is likely to remain subdued this year, too.

Despite the ongoing flux in the tech sector, large technology occupiers have also been leasing spaces in flex spaces due to benefits such as flexible lease terms, lower capex, and modern workplace designs, Colliers has said. This, coupled with ongoing recessionary conditions and layoffs in the technology sector, has led to a relative pushback in conventional leasing by these occupiers.

Glimmer of hope

While the tech sector’s share of leasing activity hit a six-quarter low at 22.3% in January-March due to global challenges, banking, financial services and insurance (BFSI) companies, consulting firms and flex workspace operators have shown steady growth in leasing activity.

“It’s a wait-and-watch period as far as tech companies are concerned. It’s also about the timing and when companies bring back employees to offices. Even as overall leasing numbers by the tech sector have come down, India will become an even more favoured location for outsourcing, given the uncertainty in US and Europe. This means we will see increased leasing by GCCs (global capability centers),” said Ram Chandnani, managing director, advisory and transactions services, CBRE India.

Manufacturing and industrial companies, as well as healthcare firms, mainly in the life-sciences category, are also leasing more space. Analysts believe office leasing momentum should pick up in the latter half of 2023 in an optimistic scenario.