The Hyderabad office market started the year off positively, with the gross leasing volume (GL V) reaching 1.58 million square feet (msf). This represented a quarter-on-quarter (q-o-q) growth of 38 per cent. However, on a year-on-year (y-o-y) basis, there was a 16 per cent drop in GLV.
The banking, financial services and insurance (BFSI) sector was the dominant player, contributing to 35 per cent of the leasing in the Hyderabad office market, while the IT-BPM sector accounted for another 15 per cent, making up more than 50 per cent of the quarterly leasing. In Q1, more than half of the deals were small-sized, with an area requirement of less than 50,000 square feet. Approximately 55 per cent of these deals were driven by office expansion plans.
‘Driven by fresh leases’
According to Cushman & Wakefield, the leasing activity in Q1 was primarily driven by fresh leases, as was observed during Q4 2022. Madhapur remained the most active submarket, with a 67 per cent share in quarterly GL V. However, the Gachibowli submarket witnessed a y-o-y drop of 30 per cent in GLV.
Despite witnessing consistent growth, developers are becoming more cautious and are trying to avoid oversupply in the market, particularly given the pipeline of under-construction projects. According to the report, there was a slowdown in construction activity during the first quarter as delays were observed in project completions, particularly after a record number of projects were delivered in 2022.
However, due to lower supply inflow and 1.58 msf of fresh leasing, the overall office market vacancy decreased by 50 basis points (bps) q-o-q to 20.7 per cent. The new supply that was added during the quarter (0.5 msf) was entirely pre-leased and helped stabilise the vacancy in the market. The vacancy rate in Madhapur remained unchanged q-o-q at 10.5 per cent, as there were ongoing enquiries for quality space from occupiers.
In Gachibowli, where there was no supply in Q1, the vacancy rate dropped by 60 basis points q-o-q to 38.9 per cent. However, the vacancy rate in Gachibowli is likely to increase in the coming quarters, with approximately 8-9 million square feet of supply expected in 2023.
Additionally, the adoption of hybrid working models by tenants, leading to space surrender, is also likely to result in higher vacancy levels in the office market. The prevailing high vacancy levels and estimated supply in the market are resulting in stable city-wide asking rentals q-o-q. However, negotiations in the market are ongoing, with some landlords offering flexibility in commercial leasing terms.
Despite this, the broader rents in the market have remained stable. The high vacancy rate of approximately 40 per cent and huge supply pipeline in the Gachibowli submarket is providing tenants with negotiation power to enter attractive rentals. In contrast, landlords in Madhapur are more secure as demand continues to remain active, and terms of leasing are relatively more balanced.