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Leasing traction remains healthy for office spaces

Commercial real estate in top Indian cities saw continued traction in 1QFY26, with net absorption of 12.6 mn sq. ft (up 34% yoy, down 22% qoq), exceeding new supply of 10.5 mn sq. ft (up 12% yoy, 7% qoq), leading to vacancy further dropping to 13.2% (down 110 bps yoy). Occupancy levels across asset owners continue to improve, as reflected in improved earnings and distributions for REITs. Asset owners have an aggressive pipeline of new assets, which should support earnings beyond the same-store growth, with yields still looking promising at 6-7% and reasonable medium-term growth prospects.

Decline in vacancy levels driven by healthy net absorption

All-India commercial real estate (aggregate of top 7 cities) had an outstanding stock of 717 mn sq. ft (up 7% yoy, 1% qoq) as of June 2025, with gross absorption of 20.7 mn sq. ft (down 2% yoy, 7% qoq) in 1QFY26 and net absorption of 12.6 mn sq. ft (up 34% yoy, 31% qoq). New supply stood at 10.5 mn sq. ft (up 12% yoy, 7% qoq), leading to a decline in vacancy levels to 13.2% as of June 2025 from 14.3% as of June 2024 and 13.7% as of March 2025. For FY2025, gross absorption stood at 87 mn sq. ft (up 3% yoy), with a net absorption of 42.1 mn sq. ft (flat yoy) against the incremental supply of 43.1 mn sq. ft (down 9% yoy).

Bengaluru saw five large deals this quarter, and Hyderabad saw two large deals, together accounting for 7 deals out of top 10 deals in 1QFY26. Among the listed players, Embassy reported gross leasing of 2 mn sq. ft in 1QFY26 (1.9 mn sq. ft in 1QFY25), Mindspace had gross leasing of 1.7 mn sq. ft in 1QFY26 (1.1 mn sq. ft in 1QFY25), while Brookfield had gross leasing of 0.7 mn sq. ft in 1QFY26 (0.2 mn sq. ft in 1QFY25).

Robust demand from GCCs; asset owners have a strong asset pipeline

Commercial asset owners suggest that the demand scenario is robust, especially from GCCs, supplemented by demand from flexible office operators, aiding occupancy improvement across geographies. Among the listed asset owners, most players are already above 90% occupancy (Brigade, DLF and Mindspace) and others are targeting to reach 90%+ occupancy by end-FY2026E (Brookfield and Embassy). We further highlight that most asset owners are aggressively adding new area to their portfolios–DLF has 16.2 mn sq. ft of under-construction area on an operational area of 45 mn sq. ft (up 35%), of which 5 mn sq. ft is nearing completion. Embassy REIT has 6.1 mn sq. ft underconstruction area on an operational area of 40.4 mn sq. ft (up 15%), followed by Mindspace REIT, which has 3.7 mn sq. ft under-construction area on 30.2 mn sq. ft (up 12%).

Yields have inched up; growth remains healthy

Distribution yields for commercial real estate for the next two years have inched up to 6-7%, on the back of improving leasing traction and occupancy coupled with growth visibility and lowered interest rates, thereby reducing historical discount to NAV

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