Why investors are shifting to tier-II cities for higher commercial real estate returns

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For years, India's commercial real-estate playbook was straightforward: buy an office in Mumbai, Delhi or Bengaluru, sign a corporate tenant, and collect steady rental income.

As office rents and land prices climb in the country's biggest cities, companies are increasingly expanding into tier-II markets where operating costs are lower and talent is more readily available. The shift is creating new opportunities—and new risks—for investors looking beyond the traditional commercial-property hubs.

Over the past four years, average office rentals across major metropolitan markets have risen nearly 35%, according to tenant-only commercial real-estate firm Vestian. Rising occupancy costs are pushing companies into cities such as Jaipur, Coimbatore, Kochi, Indore and Ahmedabad, where lower rents, improving infrastructure and expanding talent pools are reshaping local office markets.

At the same time, trends such as reverse migration and multinational expansion are accelerating demand for commercial space outside the metros, forcing investors to reassess where future rental growth may come from.

The rise of tier-II commercial markets has been years in the making. One of its biggest drivers is the movement of skilled workers away from India's largest cities.

“The growth story of tier-II cities is no longer confined to housing; it is driving the creation of complete economic ecosystems,” explained Samujjwal Ghosh, chief executive officer, The House of Abhinandan Lodha. “Reverse migration has further strengthened this momentum, with professionals, entrepreneurs, and skilled talent choosing to build their lives and businesses closer to their hometowns. This creates a cycle where residential development fuels commercial growth, which in turn generates employment, attracts investment, and strengthens local economies.”

Hybrid work has reinforced that trend by weakening the assumption that skilled workers must be based in metropolitan centres.

“Hybrid work broke down the old mandate that talent needed to be in a metro. The employers followed the talent and not vice versa, simply because it was more economical for them to set up a satellite office closer to where professionals moved than to pay steep metro salaries to lure them back,” said Nitya Yadav, lead platform and strategy architect at Integrow Asset Management.

Technology, consulting, engineering, and banking, financial services and insurance firms are leading the expansion. Global Capability Centres (GCCs) are also establishing operations outside the major metros.

According to Vestian Research, tier-II cities now account for roughly 10% of India's GCC base and 29% of the country's flexible coworking centres.

“Grade A office leasing in India’s tier-II cities has gained notable traction over the past few years, driven by factors such as cost arbitrage, with rentals typically being 20% to 35% lower as compared to tier-I cities,” said Vimal Nadar, national director and head of research, Colliers India.

Large campuses remain concentrated in established metros, but Nadar said micro, small and medium enterprises, or MSMEs, and startups are scaling rapidly and are expected to account for 20-25% of near-term office leasing in these emerging markets.

For investors, lower land prices alter the economics.

Metro markets typically require significantly higher upfront capital, compressing rental yields. Tier-II cities offer a different risk-return profile, where lower acquisition costs can offset relatively lower rents.

"A multinational company does not simply make a cursory visit; it leases office space for many years and usually returns demanding additional floors," emphasized Yadav. “Since the cost of construction and land in tier-II cities is only about half of what it costs in metropolitan cities, while the rental market has begun to catch up, the effective capital yield becomes highly favourable f...