India's flexible workspace sector has witnessed a remarkable resurgence in recent years, with the industry attracting significant private equity (PE) investments and experiencing robust growth in occupied space, according to Knight Frank India's recent report titled 'Flexing the Future: Assessing the Readiness of Flex Spaces for Evolving Commercial Real Estate Demands'.

The report highlights the fluctuating nature of PE investments in the sector. From 2017 to 2018, investments grew steadily from USD 25 million to USD 49 million, before surging to USD 113 million in 2019, driven by investors like CLSA Capital and Peak XV Partners. However, the COVID-19 pandemic took a toll, with investments dropping to USD 11 million in 2020 and further declining to USD 6 million in 2021. A resurgence occurred in 2022, with investments reaching USD 595 million, supported by deals from Hillhouse Capital and Actis. But this momentum was short-lived, as investments fell sharply to USD 13 million in the same year. In 2024, a single deal secured USD 8 million.

Despite the fluctuations in PE investments, the flexible workspace sector has experienced robust growth in terms of occupied space. Flex-space operators have taken on lease an estimated 52.9 million sq ft (msf) from 2017 to the first half of 2024, representing a CAGR of 22%. In the first half of 2024 alone, they leased 7.17 msf, a 6% increase compared to the same period in 2023, accounting for over 21% of total commercial real estate transactions.

The report highlights the strong occupancy levels in prime office markets, with Mumbai (94%), NCR (92%), Bengaluru (86%), and Hyderabad (84%) leading the way. The occupancy levels of flex workspaces are well over 80% in all major office markets. This reflects the growing demand for flexible office spaces, particularly in the IT sector, which has driven the need for scalability, flexible lease terms, and a collaborative environment.

Central Business Districts (CBDs) are known for their prime locations and well-established physical and social infrastructure. NCR- Delhi leads the rental market in the CBD category with a rate from INR 218 - 350/sq ft, followed by MMR and Bengaluru with INR 160-350 / sq ft and INR 125 - 195 / sq ft, respectively. Suburban Business Districts (SBDs), located in the suburban parts of a city, witnessed the highest rental rates in Mumbai, ranging from INR 90-475 / sq ft. In Peripheral Business Districts (PBDs), Pune leads with rental values of INR 46 - 105 / fq ft.

The flexible workspace sector is also expanding beyond the IT industry, with the Other Services sector (including professional services, digital marketing, tourism, and creative industries) and the BFSI sector also embracing these spaces. Additionally, manufacturing firms are increasingly utilizing flexible workspaces for their administrative and managerial operations, particularly in cities with a strong industrial base like NCR, Kolkata, and Pune.

While flex operators offer several advantages, such as future readiness, IT-enabled services, and ESG compliance, the report notes that the cost variation is limited and comparable to standard leases. Flex operators leverage their scale and shared services to provide reduced office rent, CAPEX, and OPEX, alongside the flexibility to adjust space needs. However, they charge a margin for these services. The choice between traditional and flexible leases depends on factors like space size, lease duration, and upfront costs.

The market landscape is evolving, with managed offices now constituting 65% of the flexible workspace market, while co-working spaces account for the remaining 35%. This growing preference for managed offices indicates a maturing market, where companies prioritize dedicated spaces that offer greater customization and control.

Shishir Baijal, Chairman and Managing Director of Knight Frank India, highlighted the industry's resilience and forward momentum, emphasizing the growing demand for innovative office spaces driven by India's status as the fastest-growing major economy. He also noted the sector's focus on embracing ESG principles and cutting-edge technology, positioning it as a leader in shaping the future of workspaces.

The flexible workspace sector in India has demonstrated remarkable resilience and adaptability, navigating the challenges posed by the pandemic and emerging as a key player in the country's evolving commercial real estate landscape. With a growing emphasis on sustainability, technology, and customized solutions, the industry is poised to play a pivotal role in shaping the future of work in India's rapidly expanding economy. As the market continues to mature, the sector's ability to cater to diverse industries and provide cost-effective, flexible office spaces will solidify its position as a vital component of India's thriving real estate ecosystem.