Demand for commercial real estate has not shown improvement in line with the residential segment in the past one year and has continued to reel under the pressure of oversupply across India, but improved economic activity has now started narrowing the gap between supply and demand in this segment.

However, sustainability of the momentum is still a key concern, according to a report on the commercial real estate sector.

Demand for office space registered significant growth in 3Q 2010 (JulySeptember) of 18% over the previous quarter, while supply recorded was lower by 11% in the same period.

This equation has helped bridge the gap between supply and demand down to a mere 6% on a pan-India basis, real estate services firm Cushman & Wakefield said in a report.

This is significant for the developers as a narrow demand-supply gap will enable them to hold on to current values. However, going forward, with significant supply in the pipeline, the gap is expected to continue to widen and will keep the market competitive, the firm cautioned.

Pan-India supply of office space declined 11% over the previous quarter and around 25% from a year ago, and this can be attributed to a slowdown in construction over the past two years and delay in project completion.

The supply for this quarter, however, should be treated as an anomaly and not as a trend, as the anticipated supply for the next 6-9 months would see a significant increase on account of renewed construction activities.

According to the report, most companies have shown a clear preference towards ready or near complete spaces, resulting in higher absorption of 9.44 million sq ft as compared with pre-commitments of 2.64 million sq ft on a pan-India basis. During the quarter, Indias financial capital Mumbai recorded a total demand of 1.5 million sq ft, down 13.6% sequentially, as most of the pent-up demand was taken up in the first half of 2010.

Also in the first half, significant demand was registered for SEZ space, keeping in mind the new direct tax code which requires occupants to register or occupy space on or before March 31, 2011 to ensure certain tax benefits.

In Mumbai, supply outstripped demand by a fair margin and with low absorption of fresh supply, vacancy level was 18% notably higher than the previous quarter.

Rising vacancy in Mumbai has kept rental values under check in this quarter and will continue to do so in the short-to-medium term. Mumbais office market, unlike many others, is expected to see a serious over supply condition in the next 6-9 months as we do not anticipate any significant rise in demand while supply will see a steady rise, said Arvind Nandan, executive director, Occupier Services.