Colombo office space market rebounds in 2021 presenting robust outlook for this year: JLL

By Nishel Fernando 
Despite a record increase in supply last year, Colombo’s office space saw its net absorption levels falling below pre-pandemic levels, marking a strong rebound in 2021, with a robust outlook for this year as office staff gradually return to pre-pandemic work routines, according to leading real estate consultancy Jones Lang LaSalle (JLL).

Vacancy levels in Colombo’s office space market fell to 17.7 percent at the end of the fourth quarter of last year, when compared to 19.70 percent in the beginning of year. The average vacancy rate also fell to 18.83 percent posting with a decline of 1.5 percent, compared to the pre-pandemic average in 2019, JLL highlighted in its latest ‘Colombo Property Market Monitor’ report.

“The broad-based absorption witnessed in Colombo office market towards the end of the year sets the seal on rebounding of the market, envisaging a robust outlook for 2022,” JLL Sri Lanka Head Jerry Kingsley said. As the office staff returned to pre-pandemic work routines, employers continued to reconfigure their real estate requirements opting for more quality spaces. Though, occupiers preferred cost-effective spaces in the parts of the year, there was a notable shift in demand towards premium Grade-A office space, with comparatively higher rentals in the fourth quarter of the year, indicating that  the quality of the space is becoming the demand catalyst.
The net grade absorption of operational Grade- A office-space rose by 200 percent year-on-year (Yoy) to 133,464 sq. ft. while recording a noticeable pre-leasing activity.

Grade A office supply rose to 2,185,800 sq. ft., recording the highest ever increase for a year.
JLL India Chief Economist and Head of Research Dr. Samantak Das outlined that the current macroeconomic environment of the country is driving investors towards the real estate assets, given the high inflationary and relatively low interest rate regime. “The low interest rates that prevailed in the country coupled with import controls on automobiles and higher inflation rates have triggered the capital flow towards the real estate asset classes in general. Consequently, a strong supply pipeline is envisaged in the commercial office market, with the heightened investor sentiment witnessed in the market from both local and foreign players,” Dr. Das elaborated.

Although some of the firms in IT/ITeS sector adopted hybrid working models such as Hub and Spoke office model, JLL pointed out that the market demand was predominantly driven by the IT/ITeS and financial services and capital market-related occupiers. 

In particular, it emphasised that Colombo has been perceived as a leading market in the region that offers premium Grade A spaces for a competitive price.

“This has been the catalyst for most of the global firms to seek office spaces in Colombo and utilise the destination as a gateway to the ever-growing South Asian market,” it said. Despite increased competition among the landlords, rental values, which have been on a downward trend since 2020, saw a gradual stabilisation throughout last year.
The monthly rentals in CBD’s Grade A office space declined by a 4.1 percent YoY to Rs.312.36 per a sq. ft. in 2021, while recording a marginal decline of 0.1 percent quarter-on-quater (QoQ) in the fourth quarter. In Colombo suburbs, rentals remained largely unchanged during the quarter with muted leasing activities.  

With more than two million sq. ft. of office space, including 800,000 sq., ft. Grade A office space in the pipeline for the year, JLL expects  the face rentals to remain range-bound  while  the premium lessors in the market may continue to  adjust rentals to remain competitive.

Although the country’s foreign exchange reserves dwindled to alarming levels amidst the increased money supply, JLL viewed that the economy kept abreast with the growth in peer economies, enabling it to remain as a captivating destination for potential investors amidst a global pandemic. Especially, it pointed out that the Board of Investment (BOI) has approved US $ 2 billion worth of investment project in 2021, which includes US $ 1.6 billion foreign investments.

“… overall occupier activity in the Grade A office market is likely to remain active in the CBD despite the anticipated tightening in the economy,” it said.