Domestic companies are taking more space in office leasing. They leased a record 31.9 million square feet (msf) area in 2024. The traction continued in the first quarter of 2025 (Q1CY25) with 8.8 msf already leased, JLL India said in a recent report. This has translated into better absorption of available Grade-A office units and higher occupancies.
On average, since 2022, domestic occupiers account for a 46% share of gross leasing versus 35% pre-pandemic (2017-2019), as per JLL. The property consultant added that BFSI firms have more than doubled their space requirements, with average deal sizes jumping from 10,500-11,500 sq. ft in 2017-2019 to 24,000-25,000 sq. ft from 2022 to Q1CY25, representing a staggering 125-130% rise.
Gross leasing refers to all lease transactions recorded during the period, including confirmed pre-commitments, but excluding term renewals and deals in the discussion stage.
Other sectors driving growth include domestic pharmaceutical; biotech; engineering, procurement, and construction (EPC); aviation; and OEM.
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SEZ demand
What also continues to aid office space occupancies is conversion of special economic zone (SEZ) spaces into non-SEZ spaces. This is working in favour of listed REITs (real estate investment trusts), which are estimated to account for over 10% of the total office stock across India’s top eight cities.
To beat the leasing slowdown in SEZ, listed REITs have been de-notifying their SEZ spaces, following the relief from the government in December 2023.
Embassy Office Parks REIT has already denotified around 6.4msf SEZ space so far, of which 75% is leased out. It is in the process of denotifying another 1.2msf. Mindspace Business Park REIT has denotified 2.2msf SEZ space out of which around 1.2msf is leased.
Brookfield India Real Estate Trust is looking to convert around 2msf of SEZ space to non-SEZ, of which it has already completed conversion of 1.5msf to date and leased around 0.8msf.
The managements of listed REITs are confident that occupancies would trend up from here. Embassy expects portfolio occupancy to improve to 90–91% from 87% in FY25. Mindspace anticipates committed occupancy to reach 95% by FY26-end from 93% currently.
Brookfield management guided for 92–94% occupancy at FY26-end from 88% in FY25. Rising occupancies should give key earnings parameters of listed REITs a boost. These REITs have given higher returns than the benchmark Nifty50 index in the past one year in anticipation of higher occupancies.
“Indian-listed office REITs delivered their first clean year of distribution per unit (DPU) growth in FY25, registering 8-15% growth and we expect 8-13% CAGR growth in DPU from FY25-27 as well,” said a report by HSBC Securities and Capital Markets (India). DPU is the total amount of income (like rental income or dividends) that a REIT distributes to its investors for each unit they hold. It is a crucial metric to gauge the income potential of a REIT investment.
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To benefit from demand momentum, these REITs have accelerated their acquisition pipelines and capital expenditure plans, leading to some leverage build-up. While rentals in India’s commercial realty sector are improving, the pace is slow. Sequentially, average rental values across all the major office markets in India rose marginally by 0.1%-6.5% in Q1CY25, according to JLL. With new supply coming in, trends in rentals need to be monitored.
Meanwhile, global capability centers (GCCs) continue to occupy a lion’s share of Grade-A office space demand in India. GCCs are typically companies of foreign origin that set up their back-office operations and R&D activities in India. Worries of a recession in the US amid ongoing tariff tensions can dampen office demand, as US-based GCCs account for a significant share of total GCC leasing in India.
