South Indian cities are scoring high with respect to the office space market in India. Recent reports indicate that the last few months have been favorable for office space activity in South India compared to other regions of the country. "During the first quarter of 2024, the southern cities of Bengaluru, Chennai, and Hyderabad collectively drove Grade A office demand, comprising 62 percent of the gross leasing in the country. Bengaluru maintained its pole position with 4.0 million square feet of office space demand, while Hyderabad witnessed a robust 2.2 times space take-up compared to the same period last year," shares an industry expert.

Bengaluru: The Leader in Office Space Demand

Bengaluru has consistently maintained its leading position in the office space market. The city's demand for office space is primarily driven by the technology sector, which includes information technology (IT) and information technology-enabled services (ITES). This sector's continuous growth and expansion plans have significantly contributed to the high demand for office spaces. Additionally, the presence of numerous global technology giants and startups further fuels the need for office space in Bengaluru. The city witnessed a demand of 4.0 million square feet in the first quarter of 2024 alone.

Bengaluru's appeal as an office space hub can be attributed to several factors. The city boasts a large pool of skilled professionals, particularly in the tech industry, which is essential for companies setting up Global Capability Centers (GCCs). Furthermore, Bengaluru offers well-developed infrastructure, including modern office spaces, reliable power supply, and excellent connectivity, all of which are crucial for efficient operations. The proactive support from the Karnataka state government, including incentives and a business-friendly environment, has also played a significant role in attracting investments.

Hyderabad: A Rising Star

Hyderabad has emerged as a strong contender in the office space market, with a robust 2.2 times space take-up compared to the same period last year. The city's office space demand is driven by various sectors, including technology, engineering, manufacturing, and healthcare. Hyderabad'sgrowth can be attributed to its strategic location, skilled workforce, and the presence of key industries. The city has also seen significant infrastructure developments, such as the expansion of the metro network and the establishment of new business districts, which have further boosted its appeal.

The Telangana state government's proactive policies and incentives for businesses have played a crucial role in attracting investments to Hyderabad. The government's focus on creating a conducive business environment, coupled with the city's relatively lower real estate costs compared to other major cities, has made Hyderabad an attractive destination for companies looking to establish or expand their presence in India.

Chennai: Strong Performance in Office Space Leasing

Chennai has shown a strong performance in office space leasing, with an increase of 41.7 percent year-on-year (YOY) in the first quarter of 2024. The city contributed a significant 17.5 percent share of the overall leasing activity, with a gross leasing activity of 2.67 million square feet. Chennai's office space demand is driven by several key sectors, including technology, automobile, engineering, manufacturing, and flexible workspace operators.

Chennai's appeal as an office space destination is due to its vast talent pool, thriving manufacturing capabilities, and competitive office rentals. The city's numerous colleges and universities offering STEM (Science, Technology, Engineering, and Mathematics) courses have facilitated the availability of a skilled workforce, making it an attractive location for companies. Additionally, Chennai offers relatively lower real estate costs compared to other major cities, further enhancing its appeal to businesses.

Sector-wise Demand and Growth Drivers

Several key sectors are driving the surge in office space demand in South Indian cities. According to the recent CBRE India's Office Figures Q1 2024 report, cities such as Bengaluru, Hyderabad, and Chennai is experiencing significant leasing activity in sectors like technology, automobile, engineering, manufacturing, flexible workspace operators, life sciences, and BFSI (Banking, Financial Services, and Insurance).

In Hyderabad, commercial real estate activity is fueled by the healthcare, pharma, and technology sectors. On the other hand, Bengaluru's office space demand is primarily driven by the engineering, manufacturing, and technology sectors. Although Chennai's demand moderated in Q1 2024, it came on the backdrop of a spectacular performance in 2023. With 10.5 million square feet of leasing In 2023, Grade A office space demand in the city was more than twice the levels in 2022, propelling Chennai to top the list for the first time in 2023.

Availability of a Vast Talent Pool

One of the key factors contributing to the growth of office space demand in South Indian cities is the availability of a vast talent pool. These cities boast a large number of skilled professionals, particularly in the technology and engineering sectors. The presence of numerous educational institutions offering specialized courses in these fields ensures a steady supply of qualified talent, making these cities attractive to companies looking to establish or expand their operations.

Presence of the Tech Industry

The strong presence of the tech industry, including global giants and startups, is another significant growth driver. The demand for office space from tech companies has been substantial due to their expansion plans, increasing headcounts, and investment in research and development (R&D) activities. The entry of new Global Capability Centers (GCCs) and the expansion of existing GCCs have also contributed to the growth of these cities. These offshore centers leverage India's skilled workforce and cost advantages, attracting multinational companies.

Competitive Real Estate Costs

Compared to other major cities, Bengaluru, Hyderabad, and Chennai offer relatively lower real estate costs, making them attractive destinations for companies looking to establish or expand their presence in India. The cost-effectiveness of operating in these cities, including lower real estate costs and competitive wages, further adds to their appeal.

Infrastructure Developments

Infrastructure developments, such as metro expansions and business district integrations, have bolstered leasing activities in South Indian cities. These developments have improved connectivity and accessibility, making it easier for businesses to operate efficiently. Additionally, the establishment of new business districts has created more opportunities for office space development, further driving demand.

Proactive Government Policies

The proactive support from the state governments of Karnataka, Telangana, and Tamil Nadu has played a crucial role in attracting investments to Bengaluru, Hyderabad, and Chennai, respectively. The government's focus on creating a conducive business environment, offering incentives, and implementing business-friendly policies have significantly contributed to the growth of these cities as office space hubs.

Expectations for the Future

Experts believe that the demand for office space in South Indian cities is here to stay and will remain robust throughout the year. "While demand for Grade A office space, in an optimistic scenario, is expected to be in the range of 55-60 million square feet in 2024, southern cities will continue to drive the market dynamics with a 60-65 percent share. Simultaneously, the prevalence of hybrid work, occupier adoption of core+flex strategies, and increasing return-to-office mandates in corporate India will boost overall flex space demand in the country, with southern cities set to play a pivotal role. Moreover, there seems to be a potential rental upside across major micro-markets in Bengaluru, Chennai, and Hyderabad," states an industry expert.

Emergence of Tier 2 Cities

Tier 2 cities like Kochi, with similar advantages, are poised to emerge as attractive alternatives, offering cost-effectiveness and a fresh talent pool. Additionally, a growing focus on sustainability initiatives will make South Indian cities even more appealing to environmentally conscious businesses.

Sustainability Initiatives

The increasing focus on sustainability initiatives is expected to further enhance the appeal of South Indian cities to businesses. Companies are increasingly prioritizing sustainable practices and green buildings, which not only contribute to environmental conservation but also offer long-term cost savings. The adoption of energy-efficient technologies, waste management systems, and water conservation measures in office spaces is becoming more prevalent, aligning with global sustainability goals.

Key Sectors Driving Future Growth

Several key sectors are expected to drive the market ahead. "Domestic occupiers, particularly in the BFSI, flex, and manufacturing/engineering sectors, are expected to continue driving demand for office space. The domestic economy has shown steady growth and resilience, contributing approximately 53 percent to the overall leasing activity," mentions an industry expert.

Office Space Absorption Trends

The office space absorption trends in South Indian cities indicate a strong preference for smaller office units. In South Indian cities, office space absorption is primarily dominated by units below 10,000 square feet, unlike Delhi NCR and Mumbai, where absorption is led by units above 10,000 square feet. Office space absorption in South Indian cities is expected to see a growth of four to seven percent in 2024, outpacing the expected two to four percent growth in the top six cities. Approximately 60 percent of the total new supply of office spaces in 2024 is expected to be concentrated in South Indian cities.

Chennai's Office Space Scenario Revealed

Chennai is becoming a top choice for Global Capability Centers (GCCs) due to its vast talent pool, thriving manufacturing capabilities, and competitive office rentals. The city's numerous colleges and universities offering STEM courses have facilitated this trend. Global firms are primarily leasing office spaces in developments located in OMR Zone 1 and Zone 2. In the past three years, American semiconductor manufacturers, EMEA-based oil and gas companies, and machinery manufacturers have been the major players in Engineering & Manufacturing (EAM) leasing, comprising two-thirds of total office leasing. The BPST sector is mostly dominated by American financial services and investment firms, followed by domestic banks. The implementation of incentives under Tamil Nadu's semiconductor and advanced electronics policy in 2024, such as capital subsidies and training support, is expected to further boost the leasing activity in the E&M sector.

Bengaluru and Hyderabad's Office Space Market: A Gist

The growth of Bengaluru and Hyderabad as leading destinations for Global Capability Centers (GCCs) can be attributed to several key factors. Both cities boast a large pool of professionals, particularly in technology and engineering, which is essential for companies setting up GCCs. Additionally, they offer well-developed infrastructure, including modern office spaces, reliable power supply, and good connectivity, which are crucial for efficient operations. The proactive support from the state governments of Karnataka and Telangana has also played a significant role, with incentives and a business-friendly environment encouraging investment. Moreover, the thriving ecosystem of technology companies, startups, and educational institutions in these cities provides GCCs with access to resources, collaborations, and innovation opportunities. The cost-effectiveness of operating in Bengaluru and Hyderabad, including lower real estate costs and competitive wages, further adds to their appeal. Lastly, the high quality of life in these cities, with good healthcare, education, and recreational facilities, makes them attractive for GCC employees.

In conclusion, South Indian cities, particularly Bengaluru, Chennai, and Hyderabad, are dominating the Indian office space market. The strong presence of key sectors such as technology, engineering, manufacturing, and healthcare, coupled with the availability of a vast talent pool, competitive real estate costs, and proactive government policies, has driven the growth of these cities as office space hubs. The demand for office space in these cities is expected to remain robust, with significant contributions from various sectors and continued infrastructure developments. Additionally, the emergence of Tier 2 cities and the growing focus on sustainability initiatives further enhance the appeal of South Indian cities to businesses. As the Indian office space market continues to evolve, it'is clear that South Indian cities will play a pivotal role in shaping its future dynamics.