Indian Commercial Real Estate Sector: Outperforms Amid Global Crisis

In 2023, global economic challenges led to significant declines in the commercial real estate sector worldwide, with investment falling by 66% year-on-year. Leasing activity fell by around 25% in major markets such as the United States and Europe. The global commercial market is in crisis mode!

In stark contrast, the Indian commercial real estate market has shown remarkable resilience and growth, attracting $5.4 billion in investment, the strongest performance since the pre-pandemic year of 2020. The Indian office sector has been particularly dynamic, attracting over $3 billion in investment, up 53% year-on-year. This growth is being driven primarily by rising demand from Global Capability Centers (GCCs) and solid leasing activity by Indian corporates, which now account for 46% of total leasing activity in the market.

Demand from the GCC has become a key growth driver in the Indian office sector. As global companies seek efficient outsourcing solutions amid economic pressures, the GCC in India is expanding rapidly. The GCC industry is expected to grow at a compound annual growth rate (CAGR) of 10% to reach $715 billion by 2027, up from $465-510 billion today. India has a 30% share of the global GCC market and employs up to 2 million professionals.

The GCC model is also evolving from a focus on cost arbitrage/standardization to a focus on customer experience and technology. This is driving up square footage in these projects, as well as spending per square foot, further driving investment in Class A commercial real estate.

Currently, only 40-45% of Fortune 500 companies have a GCC, so there is significant scope for penetration. Given India’s demographic advantage (we will add 80-90 million people to the working age population by 2027), we estimate that India will have 3.5-4 million employees in the GCC in the next 3-4 years, which means doubling the required Class A space.

Another significant trend is the growing share of domestic investors and capital flowing into this space, i.e. foreign capital, historically. Data from Preqin highlights the sharp decline in foreign fund activity in India, given the global interest rate environment and geopolitical uncertainty. Despite these challenges, the Indian real estate sector remains strong, and this resilience is largely driven by the growing participation of a new class of investors: ultra-high net worth individuals and family offices.

These investors are increasingly attracted to the tangible security of asset-backed investments and the regulated environment of alternative investment funds (AIFs), which is having a significant impact on the real estate market, where about Rs 3 trillion has already been invested. This shift underlines the dynamic transformation in investment patterns, favouring more domestic growth in the sector.

Looking ahead, we see a huge opportunity for Tier 2 cities to emerge as new hubs for growth and investment in commercial real estate. In the US, Fortune 500 companies are spread across 51 cities, while in India, all the major corporations are concentrated in 5-6 cities. While we have made great strides in transport infrastructure, there is an urgent need to upgrade urban infrastructure in these cities to improve the quality of life and attract both businesses and employees.

The shift is underway, with pioneering companies shifting their focus to tier 2 cities, which have seen a doubling of investment flows, mainly to acquire undeveloped land. This trend highlights the need for local and regional developers to improve their offerings and attract foreign investors, who tend to prefer ready-to-let or already-leased properties.

This revamp not only addresses the saturation problem in tier-1 cities but also sets the stage for more diverse and sustainable urban development across India. As the changes unfold, they are expected to play a key role in shaping the real estate investment landscape in the coming years, heralding a new era of growth beyond traditional hubs.

The article was authored by Rishabh Goel, Managing Director and Partner and Yashi Tandon, Principal Knowledge Analyst, Team Leader at BCG.