The business property market continues growing. After a record volume of almost 200,000 sq.m. of rental deals in 2017, , the data show that the rental deals concluded in the first quarter of 2018 cover 33,000 sq. m. "Usually after a peak, a decline is expected but the first quarter does not show such a downward trend and we hope this will be the case for the entire year," said Stanimira Pashova, Office Manager at Forton, a Cushman & Wakefield partner for Bulgaria and Macedonia.
Despite the numerous deals in 2017, representatives of the sector comment that Sofia lacks high quality large offices that meet the requirements of potential tenants. The economic upturn has brought a slow rise in rents in recent years but by the beginning of 2018 they have remained stable in the range of 12-14 EUR / sq. m. for class A offices and 7-10 euro / sq. m. for class B. Steady demand has spurred construction - over 350,000 square meters of new offices are currently being built in Sofia, with nearly half of them to going into operation by the end of this year, according to data from the consultancy companies in the sector.
Transactions with properties under development increasing
The limited supply last year created prerequisites for more transactions with buildings still under construction. Colliers property consultants report that 62% of the rental deals struck in the first quarter involve buildings under construction planned to be completed this year. According to Nikolay Neov, Office Manager at MBL CBRE property consultants, most of them are large-scale deals for class A spaces exceeding 1500-2000 sq.m. - a requirement that the existing buildings rarely meet. There are requests for even larger offices of about 10,000 sq.m., said Forton's Pashova.
The office areas are already outlined and are often related to the development of the Sofia Metro network: around Tsarigradsko Shose Blvd., the Paradise Center area, as well as the expanding area around Business Park Sofia in the area of Mladost residential district and the Ring Road. MBL reported that 72% of the volume of transactions in the first quarter of the year involved offices in these areas. The Grafix and Goldline office buildings located opposite The Mall on Tsarigradsko Shose Blvd., as well as the FPI Business Hub and Borisova Gradina in Hladilnika district near Paradise Center are scheduled for completion by the middle of the year.
The most active tenants in terms of the number of inquiries and concluded transactions remain those from the IT, BPO and shared services centers. Colliers has reported interest towards high-end offices also from fintech companies, as well as companies for outsourcing of internal processes related to accounting and human resources. "Most are planning a start with 200-300 employees in the first 12 months," the consulting firm added.
Mostly local companies already known on the Bulgarian market continue to play the main role in the construction of new office buildings.
"This is an indicator of maturity - these are wealthy investors who have gone through different stages and cycles of office market development, they have survived the crisis and are resilient to market fluctuations," Stanimira Pashova commented. "We are also seeing new investors, who will finish their projects this year, offering a good product on the market, meeting the tenants' requirements, and they are in no way inferior to the well-established market participants," she said.
As a continuation of last year's trend, Colliers expects the investors in office buildings in Bulgaria to include funds from South Africa, the United States, Greece, Israel, as well as local companies.
"Perhaps the only piece of news will be the arrival of investors from the United States, who are being pressured by the overly competitive environment in the heart of Central and Eastern Europe (the Czech Republic, Poland and Hungary) and the excessively high prices there to re-enter a market like Bulgaria, which they know from the previous market cycle up to 2008," according to the consulting firm's (WHICH ONE? FORTON?) observations.
Sofia remains competitive
Lat year's large-scale deals for shopping centers helped significantly Sofia and Bulgaria to conquer a key position among the prospective locations for investment in business properties in Southeast Europe. According to property consultants, access to quality workforce, macroeconomic and political factors have a greater weight in the choice of companies than the prices and quality of buildings.
"Currently, the office space market in Sofia is really attractive compared to Bucharest and Belgrade, and rents in both cities are higher than in Sofia," said Stanimira Pashova. The available volume of office space together with the forthcoming completions are absolutely relevant to the population and the workforce and Sofia is in a good competitive position, she believes.
Optimism for the year
Outside the external factors such as potential political and economic shocks, the Bulgarian office market gives no indications of a significant change in demand and prices. According to forecasts, rental prices of around 13.5 euro / sq.m. for first-class offices will remain steady by the end of this year. "Prices are clearly attractive enough for investors to forecast and implement their investment intentions, and on the other hand, these rental levels are still good enough for office tenants to consider options for relocation in search of a better environment and location," said Stanimira Pashova.
Industry experts don't expect oversupply of office space despite the brisk construction activity, which will end in the next two years. Class A and Class B unoccupied office space in the Bulgarian capital is currently slightly above 10%, according to MBL estimates.