At the close of 2022 office leasing in India witnessed 6-8 quarters of stellar post-pandemic recovery, with year 2022 posting a historic high gross lease volume of over 71 MSF. Factors that drove office leasing volumes in 2022 included a broad-based participation in office leasing by large and small occupiers, continued entry of new GCCs into India, increased hiring by IT-BPM firms and start-ups, more employees returning to office, as well as growth of managed space office market in India.
At the start of 2023, global markets are vigilant as economies brace for a potential mild recession, particularly in the USA owing to a significant rise in interest rates last year. European economies are also forecasted to slow down owing to an impending energy crisis. Occupiers from the USA play a big role in driving leasing volumes in Indian commercial office space, and along with European firms, together they tend to dominate leasing many a times.
Hence, the key question on everyone’s mind is, will the commercial real estate (CRE) continue to grow at the same trajectory as seen in the recent quarters? Or is a slowdown round the corner? Balancing off some of the global pressures are the buoyancy in the Indian economy, stability of our macro conditions and inflation risks substantially subsiding. And while it is difficult to crystal gaze CRE outlook for 2023 with certainty, as we read the tea leaves, there are some indications that give us reason to be cautiously optimistic:
#1 Global MNC’s bottom-line pressures creates a case for increased outsourcing to India
The US labour market is currently very tight, with unemployment rate as of Jan-23 month (3.4%) lower than the pre-pandemic levels seen in 1Q-2020. This is having a direct impact on wage inflation, with US private nonfarm payroll (generally considered as benchmark for organized sector salaries) growing at above 4% YOY as of most recent months, higher than the growth seen prior to 2020. With a mild recession forecasted, where topline growth isn’t guaranteed as much as the bottom-line growth (owing to commodity & wage inflation), many occupiers are bound to look for opportunities to offshore jobs to relatively economical destinations such as India.
There are large MNCs who had earlier announced job cuts in the US market, while their hiring plans remain intact in India. If this is a sign of things to come, then it is a definite positive from an office leasing perspective.
#2 Start-ups back on hiring spree
India is now third largest start-up ecosystem in the world, with more than 84,000 start-ups operating as of end-2022. These start-ups have been receiving healthy funding, as total deal count in 2022 recorded over 1,000 deals, which is comfortably higher than the number of deals seen in 2019. Given a growing business ecosystem in India, and flush with funds from global & domestic private equity and VC firms, the logical thing to do for Indian start-ups would be to continue funding their growth aspirations.
Interestingly, quite a few start-ups that were economizing on their headcount towards the end of 2022 as fears of recession loomed, have now started announcing renewed hiring plans at the start of 2023.
Recent media reports have suggested that unicorns among others have announced hiring plans for early 2023 that substantiates market anecdotes that India will see labour market exuberance. Interestingly, start-ups have contributed to rise in fresh leasing of space across leading cities, and growth of headcount in start-ups will be a positive for the office real estate.
#3 Big-4 IT firms have their revenue & employment guidance intact
The bellwether IT firms of Indian origin, considered to the dominant listed IT firms in the country, posted healthy revenue growth number in the most recent quarter ending Dec’22, ranging from 14% to 20% YOY. Not just that, nearly all of them have spelled out positively on revenue guidance and project pipeline for the near future, thereby indicating that the IT sector slowdown in India has a lesser probability. Even the US-based Accenture, a leading IT company whose results are often used by Indian IT firms for their own revenue guidance, has delivered significantly on topline growth as of Dec’22. Additionally, these leading IT firms such as TCS, Infosys, HCL Tech and Wipro have announced as of the most recent quarter (Dec-22) that they are dealing high attrition rates in the range of 20-24%, potentially indicating that they may not slowdown their hiring as yet. Core IT-BPM sector contributes nearly a third of overall office leasing volume in India, and therefore, a positive guidance from this sector is good news for the Indian CRE office market.
Factors discussed above, combined with a gradually rising share of employees returning to offices post-pandemic adds to the strong fundamentals of Indian CRE office sector, thereby making us believe that the growth story of office market will continue to move ahead beating the western market sentiments. And may also surprise many as it is yet capable of delivering another record year like it did in 2022.