Office space leasing momentum to continue, but at less than pre-pandemic pace: Crisil

Net leasing of commercial office space will grow 10-15% on-year in 2022-23 to 23-28 million sq ft across the top six cities, driven by return to office as the impact of Covid-19 wanes, increased hiring in key sectors, and expectation of healthy economic growth.

It will, however, stay below the pre-pandemic run-rate of 35-40 million sq ft on continuing caution amid hybrid work models, said CRISIL Ratings.


The pick-up will raise occupancy and keep the credit profiles of commercial realty developers healthy, showed a CRISIL Ratings analysis of 68 companies with over Rs 50,000 crore of debt and total leasable area of 150 million sq ft.

“With higher leasing, occupancy is expected to improve by 100-150 basis points this fiscal from 83.5-84.0% in the last, inching closer to the pre-pandemic levels of 86-87%. Sectors such as IT/ITeS and BFSI have driven a sharp rebound in net leasing buoyed by demand recovery starting last fiscal,” said Aniket Dani, Director, CRISIL Research.

According to him, amid a return to normalcy and subdued impact of the third wave, the number of employees working from office has increased over the past six months and the trend should continue.

After nosediving 45-50% in fiscal 2021, with many rental agreements either retracted or revised, net leasing space saw some upturn in fiscal 2022. Of the top six cities, Bangalore, Hyderabad and Pune saw the most recovery as IT, BFSI and consulting are the dominant sectors in these markets. Bangalore and Hyderabad will likely lead the charge this fiscal with a 15-20% uptick.

Completions are expected to taper gradually this fiscal year and inventories should see some rationalisation as some developers had deferred capex amid the pandemic even as demand continues to be steady.

Despite reduced occupancy during the pandemic, the credit profiles of commercial realtors remained resilient--less than 5% saw rating downgrades and around 9% actually had rating upgrades during the two fiscals through March 2022. With recovery in sight this fiscal, the credit profiles should improve as increased leasing and reduced vacancy will result in lower reliance on debt, unlike the past two fiscals.

“Leverage is expected to correct to pre-pandemic levels, with debt to earnings before interest, tax, depreciation and amortisation expected at 4.7 times by the end of this fiscal compared with 5.2 times a year earlier. The improvement in credit profiles will also be driven by better collections because of the ebbing of the pandemic,” said Kshitij Jain, Associate Director, CRISIL Ratings.

Demand recovery, low supply over the near term, and healthy leverage augur well for the industry. That said, any significant increase in debt due to acquisitions, capital expenditure or dividend distribution will remain a monitorable.