What are the driving forces behind the growth of the commercial real estate?

The commercial real estate sector has experienced a resurgence after a challenging period impacted by the pandemic and remote working trends. As employees return to offices and the economy booms, the demand for commercial real estate has surged, creating promising growth opportunities in the industry. The presence of multinational corporations (MNCs) and large businesses reopening their offices or adopting hybrid work models has played a significant role in driving this upward trajectory.

According to Knight Frank India's recent analysis, the commercial real estate market is expected to witness steady and sustainable growth in 2022. This positive market sentiment has increased the popularity of commercial real estate among major firms. Additionally, several factors contribute to the expansion of the commercial real estate industry in India, including the advent of digitalization, rising tenant confidence, and relaxed COVID standards.

The growth of the commercial real estate sector is not solely attributed to the returning workforce and a thriving economy. The rise of co-working spaces, innovative office space concepts, business-friendly initiatives, and top-notch amenities for tenants are also key factors driving the increased demand. The removal of pandemic-related restrictions has led to stable vacancies in Grade A offices, with JLL predicting the Grade A office market to reach 1.2 billion square feet by 2030.

Long-term leases and rental rate increases of 15% every three years contribute to the profitability of commercial real estate for developers. This has spurred the construction of new office space projects that are currently underway, such as the Tata Realty development in Gurugram sector 59, which will provide 550,000 square feet of grade A+ office space for corporate leasing by December 2026.

The commercial real estate industry in India has witnessed significant trends driven by the pandemic, resulting in a course correction in building usage, evaluation, and appraisal practices. Businesses are adapting their real estate investment strategies to mitigate the impact of future pandemics, leading to an increase in leasing activity. The hybrid working model has also fueled the demand for dynamic office spaces and smart working environments, supporting the sector's expansion.

Research by CBRE South Asia shows a remarkable rebound in the Indian office market, with a 97% year-over-year increase in lease activity, reaching 11.4 million square feet. Technology companies accounted for 34% of the lease growth, followed by BFSI companies (17%), flexible space operators (13%), E&M (12%), and consulting and analytics (11%). Major corporations, like Amazon and Samsung, are opting to lease office spaces to meet their expanding operational needs.

A report by Colliers and Qdesq predicts the adoption of over 60 million square feet of office space by 2023, with a focus on both metro and non-metro locations. Large enterprises in consulting, e-commerce, business process management, and IT are expected to be the primary tenants. International companies are also showing interest in Indian commercial real estate due to low vacancy rates, desirable locations, excellent amenities, and reasonable lease costs.

Despite economic challenges, the commercial real estate sector remains optimistic due to its numerous advantages. Industry players are increasingly exploring Tier-II and Tier-III cities, which are rapidly urbanizing and attracting companies seeking cost efficiencies. Moreover, the integration of new-age technologies, including sensor-activated disinfectants, retina scanners, and digitized ventilation systems, is elevating the sophistication of commercial real estate offerings.

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