Commercial realty: Soaring heights or rocky roads? A deep dive into 2023 performance

In 2023, India's commercial real estate sector demonstrated resilience amid global uncertainties. Southern cities led in new office supply, maintaining stability. The office sector saw a strong leasing momentum, with 42.2 million sq ft leased in Q1-Q3, driven by the technology sector (35-40 per cent of demand) according to CBRE.  An analysis of the performance reports by CBRE, Anarock and Knight Frank throughout 2023 reveals notable trends in the office, retail, industrial & logistics (I&L), and real estate investment sectors. Here's a snapshot of the country's commercial real estate performance.

2023 office story

Despite short-term disruptions and macroeconomic challenges, the office sector maintained its leasing momentum in 2023. A significant shift was observed as sectors beyond technology also, such as BFSI, flexible spaces, and Engineering & Manufacturing (E&M), increasingly contributed to the overall demand landscape. Despite the challenges, the sector adapted and evolved, reflecting a dynamic response to changing market dynamics.

The BFSI sector, driven by government infrastructure spending and robust home mortgage offtake, witnessed significant space uptake, reflecting a growing trend of expanding services and digitisation. Flexible workspaces also saw high demand as organisations adapted to hybrid work models.

Moreover, the diversification of leasing was not limited to sectors but extended to cities, with Chennai, Pune, and Hyderabad experiencing substantial increases in office space take-up. This trend is expected to continue, supporting the overall growth of the office sector, according to Anarock.

How domestic retail ruled?

The retail market in the country, despite inflationary pressures, showcased resilience with strong leasing and supply in Jan-Sep 2023. There has been a notable shift in leasing patterns, with categories such as departmental & homeware stores, entertainment zones, and luxury retail gaining traction.

Post-pandemic, domestic retailers emerged as key players, accounting for almost 75 per cent of overall leasing in Jan-Sep’23, across various segments. Tier II cities witnessed significant traction, reflecting the maturation of the retail market in India.

Logistics leap

The Industrial & Logistics (I&L) sector continued its performance, with demand from Third-Party Logistics (3PL) and Manufacturing players dominating leasing in Jan-Sep’23. The surge in demand from the Engineering & Manufacturing (E&M) sector is attributed to government initiatives like the Production Linked Incentive (PLI) scheme.

The I&L sector is poised to touch a 5-year high absorption mark, reaching 36–38 million sq ft in 2023, with supply addition expected to touch 35-37 million sq ft This growth is fuelled by the adoption of ‘multipolar’ supply chain strategies and increasing consumer demand for FMCG, retail, electronics, and electrical products.

2023 land rush: Who took the lead?

Land investments attracted significant attention, making up 40 per cent of the total $5.1 billion inflow into the Indian real estate sector in 2023. Domestic developers took the lead, contributing to 42 per cent of overall investments, while international funds slowed down.
Despite an expected tapering of overall capital inflows in 2023, land activity remains robust, with opportunistic bets in the residential and I&L sectors. Alternatives such as data centres, mixed-use assets, and hospitality are gaining interest alongside the traditional office sector.

2024 outlook: Ready for hybrid future?

CBRE's outlook for 2024 indicates a strong supply pipeline, with high-quality, investment-grade supply drawing flight-to-quality absorption. Hybrid working models are expected to become the norm, with corporates expressing a positive outlook on India as a preferred market for business expansion.

In the retail sector, the momentum in leasing is expected to remain positive, driven by robust consumer spending. Prime high streets and shopping centres are anticipated to remain highly occupied. Industrial & Logistics leasing momentum is expected to strengthen further in 2024, backed by rising transportation costs and growing demand for quality supply.

India's commercial real estate sector has shown resilience and adaptability in 2023, with positive trends and promising outlooks for 2024 across various segments.