In August this year, ABN Amro Bank decided to renew the lease for its 3,100 sq ft office space at Nariman Point's Sakhar Bhavan, but the landlord dropped a bomshell by jacking up the rental to Rs 500 per sq ft. The earlier lease, signed in 2004, was for Rs 180 per sq ft.

At the revised rate, the rent of $150 per sq ft per year was around 90 per cent more than even mid-town Manhattan where the annual rates are around $82 per sq ft. But ABN isn't alone in deciding to pay up top-dollar rentals for new office space in Mumbai.

The Rs 500 per sq ft rate has, in fact, become a benchmark for Grade-A office space - centrally air-conditioned, well-maintained, efficient buildings (space you get in terms of what you pay for) with good tenant mix - in Mumbai's main business districts.

Real estate brokers say landlords at Hoechst House in Nariman Point are demanding similar rentals. A landlord on Maker Chambers VI is close to signing a deal at Rs 500 per sq ft for a higher floor office with unobstructed sea-view.

Now, this rate is for chargeable (super built-up) area in a building where previously most deals were done on carpet area. So, the effective rentals could be Rs 575-650, excluding property taxes and maintenance charges.

The scene is no better in other business districts like Worli, Parel or Bandra-Kurla Complex in midtown Mumbai. New deals for Grade-A buildings are being signed in the Rs-400-500 per sq ft rent bracket.

Last quarter, Dubai-based real estate firm Limitless leased out 6,500 sq ft at the IL&FS Financial Centre, Bandra-Kurla Complex at Rs 430 per sq ft, while Morgan Stanley took 12,500 sq ft in Peninsula Corporate Park, Parel, for Rs 400 per sq ft.

No wonder, Mumbai has emerged as the fourth most expensive office market in the world, next only to the two business districts in London (Westend and City) and one in Tokyo (inner central).

A survey by real estate consultant CB Richard Ellis in May 2007 shows New Delhi isn't far behind at the seventh slot and estimates occupation costs in Connaught Place at $116 per sq ft/annum.

The rates have gone up further since the survey. Real estate brokers say the going rate at the Birla Building on Barakhamba Road in the capital is Rs 600 per sq ft.

Ashutosh Pathare, vice-president, Shapoorji & Pallonji, says there is a mismatch in supply in Nariman Point. There's very little space available but there's strong demand from private equity firms, banks, airlines and consultants.

Agrees Sanjay Dutt, deputy managing director with real estate consultant Cushman & Wakefield India: "Nariman Point has an estimated 7 million sq ft of commercial space, but not even 3 per cent of this is available for lease."

But it's not just about Nariman Point. Commercial rentals across Mumbai have shot up 15-20 per cent as supply has failed to keep pace with the spurt in demand, say real estate observers.

BPO major Firstsource recently renewed its lease at Peninsula Corporate Park, Parel at Rs 225-275 (basic rent, plus other costs like taxes and maintenance), revising it from the Rs 70-80 per sq ft when it moved here in January 2004.

"The spurt is higher in case of renewals," adds a real estate expert. The rentals also depend on the amount of space a company lease out. If the area is huge (30,000 sq ft), the rentals could be lower, and vice-versa.

"The price rise is a temporary phase as there is no space available. But this is not sustainable in the long run," said Anuj Puri, CEO, Jones Lang Lasalle-Meghraj.

The market is likely to remain tight in the next few months till new supplies come in. Mumbai will add 22 million sq ft of Grade-A office space in the next two years.

Jones Lang Lasalle-Meghraj estimates the Grade A office space in Mumbai to double by 2008-09 from the existing 19 million sq ft. These should ease pressure on commercial rentals if the supplies-in-the-pipeline come on time and there's no slip in delivery dates.

Recent deals in commercial space in Mumbai

• Fidelity Investments leases out 1,850 sq ft in Maker Chambers VI, Nariman Point, at Rs 450 per sq ft
• KPMG leases out 30,000 sq ft in Kamala Mills compound in Lower Parel at Rs 275 per sq ft
• House, Prabhadevi, at Rs 350 per sq ft
• Avendus Advisors leases out 12,000 sq ft in IL&FS Centre at Bandra-Kurla Complex at around Rs 300 per sq ft
• ABN Amro renews lease at Rs 500 per sq ft (from 180 per sq ft signed three years back) for 3,100 sq ft at Sakhar Bhavan in Nariman Point
• Morgan Stanley leases out 12,500 sq ft of space in Peninsula Corporate Park at Parel at Rs 400 per sq ft
• Three leases renewed at Dalamal House, Nariman Point, with sea-view, at Rs 430 per sq ft (up from Rs 130 per sq ft 3 years back)