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Tier-II cities fast emerging as growth frontier in office & retail sector: CBRE

These cities are poised to be the new growth vectors in India in the coming years – driven by their progress in the real estate landscape, work environment, quality of life, and sustainability.

Tier-II cities fast emerging as growth frontier in office & retail sector: CBRE
The quality of life in these cities is well supported by the relatively affordable cost of living compared to tier-I cities, along with an increasing presence of healthcare facilities and educational institutions.

Tier-II cities in India are thriving in the post-pandemic world, led by their growing economic significance, infrastructure development and consequently, improved connectivity and real estate growth, as per a CBRE research report, titled ‘Tier-II cities: Coming of Age’.

These cities are poised to be the new growth vectors in India in the coming years – driven by their progress in the real estate landscape, work environment, quality of life, and sustainability. These cities are large talent bases, taking offices closer to talent holds the potential to be alternative centers of growth, fueling innovation and growth for office occupiers. Hence, it is increasingly critical for these cities to sustain the current pace of infrastructure development and strengthen skill development.

The widening economic base and access to a skilled talent pool are prime influencing factors for occupiers to consider expanding in tier-II cities. The various business clusters across tier-II cities offer a mix of non-SEZ and SEZ establishments with average quoted rentals ranging from as low as INR 30-40 / sq. ft. / month to about INR 60-80 / sq. ft. / month. Most cities have also recorded a growing presence of flexible space operators, industrial hubs and malls.

According to the report, the quality of life in these cities is well supported by the relatively affordable cost of living compared to tier-I cities, along with an increasing presence of healthcare facilities and educational institutions. There is also rising investor interest over recent years, with various plans announced by domestic and global firms to establish their footprint in these markets.

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Commenting on the same, Anshuman Magazine, Chairman & CEO – India, South-East Asia, Middle East & Africa, CBRE, said, “The implementation of focused policy reforms and strategic infrastructure initiatives by the state/central government has resulted in consumer preference leaning towards suburbs / smaller cities. This is evidenced by the entry and expansion of flex operators and the increasing footprint of industrial establishments. The growing urban sprawl is likely to spread beyond tier-I cities, so that tier-II cities take on the mantle of the future. Recognizing this need, the government started undertaking measures to plug in the prevailing infrastructure/business gaps that would boost the development of these cities.”

Ram Chandnani, Managing Director, Advisory & Transactions Services, CBRE India, said, “Major tier-II cities are key to the imminent real estate boom, now boast of flourishing central and secondary business districts, with some even having established peripheral business clusters. Prominent developers are now making a beeline for these cities, propelled by demand from domestic and global corporates, flexible space providers, start-ups, ed technology firms, etc.”

Key drivers of real estate demand in Tier II cities

Office Market in top tier-II cities:

Increasing number of firms aim to tap more talent and benefit from the infrastructural advantages of these locations.

According to the report, the location agnosticism of talent opened a world of opportunities for both global/domestic corporates, as they were no longer constrained by geographical limits. Now that corporates are looking for their workforce to return to work, many of them are also venturing into these tier-II cities to be in proximity to the talent. While tier-I cities would continue to remain the most preferred choice currently for office occupiers, in the medium to long term, CBRE expects a rise in office space take-up in tier-II cities as well.

Occupiers are further encouraged by the quality infrastructure as well as affordable land cost and operations in these locations. While some are leasing space to set up their operations, others also opt for the flexible space route. Chandigarh, Jaipur, Kochi, Ahmedabad, Lucknow, and Indore have more than five flex operators as of H1 2022, while Bhubaneshwar, Visakhapatnam and Thiruvananthapuram and Coimbatore have 2-5 flex operators in the city.

Chandigarh, Kochi, Thiruvananthapuram, and Ahmedabad are cities with relatively higher stock as of H1 2022, while cities such as Jaipur, Coimbatore, and Indore have seen a relatively higher spurt in activity in the past six months, both in development completions as well as space take-up.

CBRE’s ‘Cost of Living Index – 2022’ indicates cities such as Kochi and Coimbatore are much more affordable than others. On ‘Health & Wellbeing’ and ‘Education Quality’, most cities either emerged as ‘Front runners’ or ‘Performers’.

Innovation and resilient infrastructure are key drivers of economic development. The report highlights cities such as Ahmedabad, Bhubaneswar, Visakhapatnam, and Coimbatore are ‘front runners’ on this front and most others are ‘aspirants’. A few cities are catching up on ‘Decent Work & Economic Growth’, indicating that heightened focus on job creation would be required in the coming years.

Sustainability and climate action have globally become social mores in business circles. The report highlights cities such as Coimbatore, Visakhapatnam, Thiruvananthapuram, Indore, and Chandigarh to be relatively more sustainable.

Retail Market in top Tier-II cities:

Most tier-II cities have recorded a growing presence of domestic as well as global brands across various categories

With an increasing focus on the expansion of metro, rail & road networks, airports and developing commercial clusters, the residential sector too is booming in these cities as the dream of owning a house, is now becoming a reality in these locations. As a result, retailers and mall developers are looking to leverage the buying power of the increasing populace in these cities. Growing internet usage has whetted the appetite for quality products in these areas, thus giving a fillip to e-commerce too.

Most tier-II cities have established high-street locations with a few having emerging ones as well. Well surrounded by residential catchments, these shopping destinations cater to a wide audience providing a diverse mix of brands across athleisure, fashion & apparel, F&B, department stores, hypermarkets, fine dining restaurants, car showrooms and electronics.

Each of these cities also houses malls by some key developers with a varied presence of brands across different categories. The central business district across these cities and their peripheral locations is the most preferred choice for these developments.

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First published on: 19-10-2022 at 13:40 IST
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