Indian Tier 2 cities are emerging as the new big frontier of the real estate sector. With improved infrastructure, affordable land prices and upswings in the market, tier 2 cities are proving to be long-term yielding for investors. With government plans tying these locations with major growth centres, they have become magnets for not only local buyers but international investors as well. The cities with their parks and scenic landscapes, are especially drawing the young, environmentally aware generation looking for luxury homes.
Commercial Real Estate Key Drivers
The development of Tier 2 Indian cities’ commercial property has been driven by various factors. Following is a summary of the key drivers:
- Economic Diversification and Development
Tier 2 cities are getting increasingly diversified economies with higher growth in IT, manufacturing, and services, which is leading to the demand for commercial space such as offices, warehouses, and retail space. Smart Cities Mission and government actions under AMRUT have infused infrastructure, and the cities have become business-friendly and investor-friendly. This development aids in urban development balance, increasing economic activity in smaller locations, regional well-being and sustainable growth as a whole in the nation.
- Retail and E-commerce Growth
Chain store expansion to small cities is driving demand for commercial real estate space in malls, hypermarkets, and stores. Simultaneously, rapid growth in online commerce has generated a growing demand for more warehousing and logistics hubs in the cities to serve regional markets effectively. This simultaneous growth in retail and e-commerce is driving demand for commercial property, opening up new opportunities for expansion and economic development of small cities across the country.
- Reasonably Priced Real Estate Costs
Land costs and property values in small cities are relatively cheaper compared to metro cities such as Mumbai, Delhi, or Bangalore, yielding more affordable costs for companies to establish operations. This cost-effectiveness is propelling commercial real estate expansion in these areas. Smaller cities also present better returns on investment (ROI) in commercial property than market-saturated metropolitan areas, luring investors and developers. These two factors – lower costs and favourable ROI – are driving the growth of commercial real estate in these upstart cities.
- Transforming Work Culture and Preferences
The COVID-19 pandemic hastened working from home, leading businesses to decentralize and set up offices in tier 2 cities to attract local skill sets and save costs. This transformation is fueling the need for commercial property in these markets. The growth of the commercial property market is also being complemented by the growth of co-working offices in smaller cities for start-ups, small businesses, and freelancers. In combination, all these trends are transforming the face of property and opening up new opportunities in new city locations.
- Urbanization and Population Explosion
Migration from rural areas to cities is pushing the development of smaller cities, driving demand for commercial space such as shopping malls, office buildings, and co-working facilities. Currently, the growth in the middle class in these cities, having higher disposable income, is pushing demand for retail space, entertainment complexes, and other commercial outlets. These forces are driving urbanization, which is making smaller cities more and more appealing for business and investment and fostering the creation of various commercial real estate prospects.
- Enhanced Infrastructure
Advanced infrastructure in smaller towns, like highway construction, airport development, and railway tracks, has also provided increased connectivity, thus improving the accessibility of such towns to corporations. Improved digital infrastructure and better internet penetration have also facilitated companies, particularly IT and services, to operate freely. All these developments have increased the attractiveness of small cities for investment and business operations, leading to economic growth and prospects for commercial real estate development in these new urban centres.
Shaping Office Spaces: Tier 2 Cities As The Spoke Model
The hub and spoke model is a business model where the major place, or the ‘centralised location’ or the ‘hub’, is determined in Tier 1 cities and smaller workplaces, the ‘spokes’, in Tier 2 cities. By this, the companies are able to access pools of talent at various geographical points.
This creates the demand for smaller, cost-effective spaces with lower maintenance costs, where coworking operators have a pivotal position. As flexible workplaces are needed more and more, landlords are more inclined to renovate their properties as co-working centres. With lower rentals and lower living costs for an improved work-life balance, this also benefits the development of freelancers, start-ups, and small companies in search of flexible and low-cost working space.
The growth of commercial property in tier 2 Indian cities is an outcome of the combination of economic, demographic, infrastructural, and policy reasons. As cities expand, these are likely to play a critical role in the overall commercial property scenario in India. This direction offers scope for investors, builders, and companies to leverage the potential of new markets.
