Knight Frank India has released its flagship report titled ‘India Warehousing Market Report – 2023’, which assessed warehousing leasing across 8 primary markets and 17 other secondary markets in India. In the financial year 2022-23 (April 2022 – March 2023), the top 8 markets experienced a historic high in demand, reaching 51.3 million square feet (msf).

The compound annual growth rate (CAGR) from FY17-23 has been 24%. Notably, Mumbai, Bengaluru, and Kolkata witnessed a historically high volume of transactions in FY23. The surge in activities from the Third-party logistics (3PL), manufacturing, and retail sectors has contributed to the increased demand for warehousing, the report said.

Compared to the previous year, with the 3-PL sector leading the pack with a 34% year-on-year (YoY) growth. The manufacturing sector also experienced a significant rise in demand, with a 23% YoY growth. However, the e-commerce sector recorded a decline in demand in FY23, primarily due to early capacity building in recent years and a gradual shift towards flexibility.

India has benefited from the sustained move towards decentralisation of manufacturing capacity from China, the most recent move being made by Apple, which now makes 7% of its iPhones in India compared to just 1% in 2021, the report said.

Also, the government’s focus on ‘Make in India’ and the Production Linked Incentive (PLI) scheme have started paying dividends and continue to boost the prospects of manufacturing industries in the country. On the other hand, Warehousing rents across 7 of the 8 primary markets grew in the range of 3-8% YoY in FY23.

Warehousing transactions across top 8 cities

Warehousing market demand has sustained record highs of the previous year in FY 2023 compared to the office and residential markets which are yet to approach similar highs since the pandemic. While Mumbai and NCR led the market in terms of overall transaction volumes during FY23, Bengaluru and Kolkata witnessed the highest percentage growth in annual transacted volumes at 25% and 18% YoY respectively.

Sector-wise transactions and share

The manufacturing sector, including automobile and engineering industries, has witnessed significant growth in its market share of total transactions since the pandemic subsided, rising from 23% in FY 2021 to 30% in FY 2023. Among all occupier groups, the 3PL sector held the highest market share at 39% in FY 2023, which is the highest share recorded by any sector since FY 2017.

In FY 2023, 25% of the total space occupied by the 3PL sector was located in Mumbai, followed by the NCR (National Capital Region) at 23%.

However, the volume transacted by the e-commerce sector experienced a 71% year-on-year (YoY) decline in FY 2023 due to the excess capacity built during the pandemic to meet the surge in consumption. This decline in demand is expected to be temporary, as the sector’s activity is likely to revive once the excess capacities are exhausted in the upcoming year.

With mobility normalcy restored post pandemic, consumer demand has rebounded in the hard format stores, and this had a direct bearing on the warehousing space take-up of the retail sector.

The sector’s share spiked from 4% in FY 2021 to 11% in FY 2022 as retailers had to quickly add warehousing capacities to cater to the swift rise in demand. This increase in demand has sustained in FY 2023 with retail sector occupiers taking up 13% of the total space transacted, attaining a new high for the sector.

An estimated 13% of the volume transacted during FY 2023 was for industrial use i.e. for end-use involving some form of manufacturing activity from sectors like automobile, FMCG and FMCD. Among the top eight markets in India – Pune, Chennai and Ahmedabad are cities with a significant industrial base.

The market for industrial-use properties is expected to gain traction gradually as the government’s focus on increasing India’s manufacturing heft starts to pay dividends.

Shishir Baijal, chairman and managing director, Knight Frank India, said, “The warehousing market has experienced consistent growth, with transaction volumes exceeding the previous year’s figures, which were already the highest in history. This growth is not limited to the top eight markets but has also extended to secondary markets, supported by enhanced infrastructure such as highway networks, rail systems, and air transportation. Indeed, there has been a noticeable shift in the occupier groups within the warehousing market.”

While FY23 saw occupier demand sustain at the record levels seen in FY22, rents in most markets have maintained the upward trajectory they set in the previous year. Rent growth has been the bane of the market over the past decade with developers facing stiff resistance from occupiers who were extremely reluctant to cede any ground on this aspect.

Inflationary trends in steel and cement caused by a supply crunch due to the pandemic and the more recent rate hikes left little choice for developers and operators but to increase rates over the past two years. This coincided with the strong demand seen during the period and maintained the market balance in favour of the developer, pushing up rents across seven of the eight primary markets in the range of 3-8% YoY during FY23.

Annual share of Grade A transactions

The development of Grade A warehousing facilities has continued to increase in recent years, and currently constitutes 40% of the total stock compared to 38% in FY22.

The larger warehousing markets of Mumbai and NCR have a significantly lower proportion of Grade A warehouses as they are much older markets, and a bulk of their stock had been built before the demand for Grade A warehousing gathered momentum. Pune and Chennai have the highest concentration of Grade A stock due to their primary demand base of auto and auto ancillary occupiers.

The rising trend of Grade A development continued to gain momentum in FY23 with developers increasingly focusing on higher grade park development compliant to contemporary norms and the higher throughput requirements of businesses today.

In addition to the emerging focus on sustainable development, there is an increasing need for improving the aesthetics of these warehousing parks and enabling a better working environment.

59% of the supply coming online in FY23 across the 8 primary markets was in Grade A properties compared to 55% in FY22. 6 out of the 8 markets have seen the share of grade A stock increase in FY23 compared to the previous year.

Warehousing stock, supply, vacancy and the potential assessment

Knight Frank has conducted a ground-up survey of warehousing stock in the top eight markets of India to arrive at an assessment of the supply scenario that exists in the market. The eight primary markets of India held an estimated 38 mn sq m (412 mn sq ft) of warehousing stock at the end of FY23.

The Mumbai market accounted for 34% of this stock and along with NCR, constituted 52% of the total stock. Strong transaction volumes, in tandem with comparatively lower supply in FY23, have brought down the vacancy level to 12.2% during the year. Vacancy levels in the major markets of Mumbai, NCR, Bengaluru, Pune and NCR have dropped significantly compared to the previous year.

Secondary market demand surges

Going beyond the top eight primary Indian markets, the Knight Frank’s report also delves into the performance of warehousing transaction volumes of 13 secondary markets. The share of secondary markets in the total transactions recorded in the country has grown consistently from just 11% in FY 2019 to 21% in FY 2023. These markets registered a surge in annual warehousing transaction volumes by 15% YoY from 11.98 mn sq ft in FY22 to 13.75 mn sq ft in FY23.

Lucknow led in terms of annual transacted volumes at almost 2 mn sq ft and Visakhapatnam experienced the highest growth at 265% in FY23. The fact that transaction volumes in these secondary markets have grown 15% YoY in FY 2023, while the eight primary markets saw demand remain stable in YoY terms, underscores the increasing traction in these emerging warehousing markets.