With continuous infrastructure upgrades and commitment of the government to reinforce Chennai’s positioning as an economic and investment hub, the real estate market of the city has grown from strength to strength in recent years. The city not only beat market expectations in 2023 but holds promise of an equally strong performance in 2024. The office market of Chennai breached all earlier highs and recorded more than 2x leasing activity in 2023 as compared to the annual average of the last four years.
At the same time, other real estate asset classes like industrial and warehousing, housing and data centres also saw strong traction during the year. Moreover, Tamil Nadu state has seen about USD 2,000-3,000 million of overall FDI inflows in each of the last two fiscal years. The momentum of inflows is likely to continue in the next few years and trickle down to the real estate sector, accelerating growth of various asset classes.
During 2023, the city recorded the highest-ever office leasing with 10.5 mn sq ft of gross absorption and made it to the top three list for the first time alongside Bengaluru and Delhi NCR. Technology and BFSI players drove the leasing during 2023 accounting for about half of the total share in leasing activity. Interestingly, leasing by flex players saw a 3X annual rise in the city during 2023. Amidst robust demand, vacancy levels dipped a significant 3.7pp YoY and stood at 16.3% at the end of the year.
The demand momentum is expected to continue into 2024 as well. Furthermore, the city has a pipeline of 4-5 mn sq ft of new Grade A office developments at different stages of construction. Majority of the upcoming supply is likely to be seen in MPR and PTR micro markets of the city. Pursuant to the recent floor-wise denotification of SEZs, Chennai is likely to see additional supply of office space. As of 2023 end, Chennai had about 26.5 mn sq ft of SEZ office space, at a vacancy level of about 19%. We expect incremental leasing from these spaces as well during the next few quarters.
“The real estate market of Chennai has exceeded expectations during 2023 and is poised for sustained growth in the next few years. The office market has recorded an impressive 10.5 mn sq ft of gross absorption during 2023, driven by OMR Zone 1 and MPR micro markets in the city. Global capability centres (GCCs) also viewed Chennai as an attractive location for space take-up led by cost-effective rentals and presence of quality Grade A stock. The demand momentum, particularly during the second half of the year 2023, will pave way for an optimistic start to 2024. Amidst healthy demand, office rentals are likely to firm up by about 3-5% in the next few quarters.” says Arpit Mehrotra, Managing Director, Office services, Colliers India.
During 2023, with more than 5 mn sq ft of gross absorption, Chennai saw robust industrial and warehousing leasing demand, an 85% YoY rise, edging ahead of Delhi NCR, the usual front runner. The city accounted for about 20% share in the overall leasing across the top five cities. Key micro markets like Oragadam, NH-48 and NH-16 of Chennai saw the bulk of the demand during the year. While 3PL players dominated the leasing activity with about half of the demand, Engineering players accounted for about 38% demand.
With over 110 MW Chennai accounts for about 14% of the data centre capacity as of 2023, second highest in the country followed by Mumbai. The city witnessed significant investments for DC in the last few years and with a 3X rise, saw the highest growth in DC capacity in the post-pandemic period. Supported by the upcoming infrastructural growth, presence of sea cables and investments, the sector is likely to see significant rise in DC supply in the next 3-4 years.
The strong rebound in commercial realty is translating into heightened activity in the residential segment as well. On account of favorable demand-supply dynamics, average housing prices in Chennai have seen a modest annual increase of about 3-5% in 2023. Micro markets like North Ambattur and North and West Thiruvallur have witnessed the highest rise in housing prices. The upcoming metro corridors in (Coastal) Chengalpattu and (West) Poonamallee sub-markets are likely to firm up residential demand in these markets. With increasing
