The Sofia real estate market has absorbed a fresh 100 000 sq. m. s of office space in the first six months of the year. The brisk pace of construction promises to deliver another half-million sq. m. New construction rentals continue and prices are currently stable, according to the three large consultant companies on the local real estate market.
The lease of new office space during construction remains steady on the office property market. "Large companies have very specific requirements for their office environment. They familiarize themselves with the project at an early stage and when an office building meets their needs, they sign a lease contract before the use permit has come through. They do not wait to see the building completed," explained Stanimira Pashova, office space manager at business property consultant Cushman &Wakefield Forton. Pashova added that this brings certain predictability to the market and it is a good sign that quality office building projects are occupied exceptionally quickly.
According to the Bulgarian branch of the international consulting company Colliers, 22% out of the 61 000 sq. m. leased in the first half of the year were contracted during construction. Most of the deals (28%) came from office relocations, followed by expansion (26%) of companies already present in Bulgaria.
Unoccupied spaces remain at about 9%
New construction leases also explain the negligible increase in spaces available on the market since the beginning of this year, in spite of a number of new projects being completed in that period. According to Colliers, their volume nearly equalled that of the entire 2018.
Cushman &Wakefield Forton put the available office space in Sofia in the first six months of 2019 at 9.9%. In class A buildings the figure is under 9%. There is a slight increase in class B buildings, chiefly due to the tendency of some companies to upgrade to class A, representatives of the consultant explained.
According to commercial real estate consultants MBL, after a record volume of office space hit the market in the first quarter of 2019, the percentage of available space rose to 9.5. Subsequently, it dropped back to 9.1% at the end of the second quarter.
4% to 6% growth in the availability
The increase in available office space was in the range of 4% to 6% (depending on the assessment) in the first two quarters of 2019. According to Cushman &Wakefield Forton, the newly completed class A and B office buildings in the same period totalled nearly 107 000 sq. m. This growth of 6% since the beginning of the year brought total availability to 1.925 million sq. m. Colliers's data places the number at 91 000 sq. m., or a 4% rise up to 2.202 million sq. m. MBL assessed the increase at 5% - by 93 000 sq. m. to 2.06 million sq. m.
The first quarter of the year saw a larger area become available than the second - 70 000 and 23 000 sq. m., respectively. Experts at MBL believe the results from the first half of 2019 are the best in the last 8 years. Cushman &Wakefield Forton's data points to 60 000 and 43 000 sq. m.
Flagship office buildings that appeared in the first half of 2019 include those in the vicinity of Business Park Sofia - Adora Business Center and the first stage of Garitage Park (next to the Sofia ring road). Others are concentrated around Tsarigradsko Shose Blvd., like the GoodLine building and Space Tower (Experian) near Mladost residential district, and Office A next to The Mall, recently purchased by the Bravo Property Fund. Tower B near Bulgaria Mall is a new addition on Bulgaria Blvd.
A further 400 000 to 450 000 sq. m. under construction
In the first half of 2019, the projects under active construction in Sofia totalled 404 000 sq. m., according to Cushman &Wakefield Forton, while Colliers quotes 437 000 and MBL a little over 450 000. The projects are expected to be completed no later than 2022. If they are all completed, the available office space in Sofia will grow by at least 20% by 2021-22. MBL's analysis states that a further 400 000 sq. m. have been planned, pending construction permits.
In the meantime, the acquisition market is cooling down. For the first six months of the year, real estate investment deals totalling just over 167 million euro were concluded, Colliers reports. For comparison, last year's total market volume reached 668 million euro, and in 2017 it was a record high of 957 million euro, with companies from South Africa actively shopping for malls. Now, in addition to the volume of transactions diminishing, the data indicates much more modest participation from international buyers.
Many companies on the market are refraining from entering into long-term deals, waiting for the buildings that will be completed in 2020-21. According to Colliers, short term office solutions will be in demand. Cushman &Wakefield Forton forecast that the available space will increase slightly in the long run, which may put pressure on rents.
From a short-term perspective, Colliers expect that the deficit in class A and class B office buildings will deepen in the second half of 2019. Cushman &Wakefield Forton's forecast is that the leasing market will be more dynamic in the third and fourth quarters since they traditionally see increased activity.
Rents unchanged at 13 to 15 euro per sq. m.
Companies report that office space rent prices have remained stable in Sofia. For the city centre, class A buildings still rent for 15 euros per sq. m., according to Cushman &Wakefield Forton. Colliers confirm that price, adding that it has not changed since 2017.Colliers say that in 2017 rents in areas adjacent to downtown and the periphery increased to 14 and 13 euro per sq. m., respectively. Cushman &Wakefield Forton confirm that class A buildings along the large boulevards rent for 13-14 euros per sq. m.
For class, A offices offers to vary between 12 and 14 euro per sq. m. Class B buildings rent for 8 to 11 euros per sq. m., commented MBL. The company expects no significant changes in the second half of 2019.
Cushman &Wakefield Forton's data shows that the profitability of investment deals has also been steady at 7.75% to 8% for first-class assets.
The Sofia real estate market has absorbed a fresh 100 000 sq. m. s of office space in the first six months of the year. The brisk pace of construction promises to deliver another half-million sq. m. New construction rentals continue and prices are currently stable, according to the three large consultant companies on the local real estate market.
The lease of new office space during construction remains steady on the office property market. "Large companies have very specific requirements for their office environment. They familiarize themselves with the project at an early stage and when an office building meets their needs, they sign a lease contract before the use permit has come through. They do not wait to see the building completed," explained Stanimira Pashova, office space manager at business property consultant Cushman &Wakefield Forton. Pashova added that this brings certain predictability to the market and it is a good sign that quality office building projects are occupied exceptionally quickly.
