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Still going strong

Commercial real estate in top Indian cities saw continued traction in 2QFY26, with the net absorption of 13.9 mn sq. ft (up 36% yoy, 11% qoq) exceeding the new supply of 11.6 mn sq. ft (up 6% yoy, 11% qoq), leading to vacancy further dropping to 12.7% (down 145 bps yoy). Occupancy levels across REITs continue to improve, leading to better earnings and distributions. An aggressive pipeline of upcoming assets should support earnings beyond the same-store growth across most asset owners. Distribution yields have come off to 6-7% (2027E) with improved stock performance, even as the medium-term growth prospects remain promising.

Decline in vacancy levels driven by healthy net absorption

All-India commercial real estate (aggregate of top-7 cities) had an outstanding stock of 729 mn sq. ft (+7% yoy, +2% qoq) as of September 2025, with gross absorption at 21.7 mn sq. ft (-12% yoy, +5% qoq) in 2QFY26 and net absorption at 13.9 mn sq. ft (+36% yoy, +11% qoq). New supply was lower at 11.6 mn sq. ft (+6% yoy, +11% qoq), leading to a further decline in vacancy levels to 12.7% as of September 2025 from 14.1% as of September 2024 and 13.2% as of June 2025. For 1HFY26, the gross absorption stood at 42.4 mn sq. ft (-8% yoy), with a strong net absorption of 26.5 mn sq. ft (+35% yoy), against the incremental supply of 22.1 mn sq. ft (+9% yoy).

Bengaluru saw six large deals this quarter, and Hyderabad saw two large deals, together accounting for 8 out of the top-10 deals in 2QFY26. TCS alone signed 3.9 mn sq. ft in Bengaluru (Sattva Knowledge Point in Yeshwantpur and 360 Degree Business Park in Electronic City) across four assets in 2QFY26. Among the listed players, Embassy reported gross leasing of 1.5 mn sq. ft in 2QFY26 (2.1 mn sq. ft in 2QFY25), Mindspace had gross leasing of 0.8 mn sq. ft in 2QFY26 (2.1 mn sq. ft in 2QFY25), while Brookfield had gross leasing of 0.6 mn sq. ft in 2QFY26 (1 mn sq. ft in 2QFY25)—the lower yoy leasing is on account of lower vacancies; all asset owners are at >= 90% occupancy levels.

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 within our coverage, all players are already above 90% occupancy (DLF, Mindspace, Brookfield, Embassy, Prestige and Brigade), with most targeting 93-94% occupancy by end-FY2026. We further highlight that most asset owners are aggressively adding new area to their portfolio—DLF has 14 mn sq. ft of under-construction area on an operational area of 49 mn sq. ft (up 29%), of which 2.7 mn sq. ft is nearing completion in FY2026E. Embassy REIT has 7.2 mn sq. ft under-construction area on an operational portfolio of 40.9 mn sq. ft (up 18%), followed by Mindspace REIT, which has 3.7 mn sq. ft under-construction area on 31 mn sq. ft (up 12%).

Yields have inched down on account of better stock performance, growth remains healthy

Distribution yields for commercial real estate have come off to 5-6% in FY2026E and 6-7% in FY2027E– the lower yields are a result of the improved stock performance in recent quarters. The yoy improvement in yields is on the back of improving leasing traction and occupancy, coupled with growth visibility and lowered interest rates, thereby reducing the historical discount to NAV.

Technology services saw a slight increase in headcount, although concerns remain

Tier-1 IT companies added 5k employees (net) in 2QFY26. We highlight that the headcount reduction across tier-1 IT employers seems to have abated for now, as it is also visible in the utilization of IT employees, which remains healthy at ~85% in most firms. However, the Street remains concerned about the overall environment for IT-related demand.

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