|"No major deviations from standard practices so far" Verka Petkova, Business Development Director at Colliers|
Following the initial lull immediately after the coronavirus outbreak, deals did happen - mainly rent agreements initiated before the health crisis was finalized. Companies whose contracts were about to expire most often extended them for half a year to have an option to react in the new situation. Due to the unclear prospects, radical moves have been avoided.
According to the information provided by property consultants, there was no significant renegotiation of prices and financial conditions in the existing contracts in the office segment. Tenants in some sectors tried to negotiate discounts on rent or deferral of payments. Some lessors made a gesture of partnership, offering discounts of about 10% for the period of the state of emergency.
Other lessors provided discounts on the service fee for that period, which they then compensated by a higher fee for office space disinfection. However, most lessors insisted that the rent be paid in the originally agreed amount. In some cases, companies that had the right to notice made requests to return the excess space to the lessors. Overall, however, these moves have not led to a significant change in the average rental levels. According to Colliers, they remain at an average of 13.5 euro per square meter per month for Class A office space and 10 euro per square meter for Class B.
Getting Back to Rhythm
Bulgaria declared a state of emergency on March 13 in an effort to limit the spread of the coronavirus disease, imposing restrictions on travel, mass gatherings and visits to restaurants, bars, cafes, sports halls, gyms and cinema theatres. The state of emergency was lifted on May 14 and was replaced by a state of epidemic emergency with some of the restrictions relaxed.
The market recently started to return to its usual rhythm but for now, its volumes are much smaller, according to Stanimira Pashova, office space manager at Cushman & Wakefield Forton. There are new inquiries and deals. Some involve tenants whose office space needs have increased during the pandemic. Others are signed with companies looking to reduce their rented space because their business has shrunk.
"Recently, rent agreements include clauses that give tenants more flexibility to terminate contracts in the event of a second wave [of coronavirus disease]. The parties resort to the so-called "step-up" rent (in this case increasing over time), keeping the average income for the lessor", Verka Petkova, Business Development Director at Colliers, explains.
Some potential tenants are trying to take advantage of lower demand to aggressively request much lower rental levels than those of three or four months ago, added Anton Slavchev, CEO of Slavchev Consulting.
However, most lessors are not yet ready to make such discounts and see no reason to do that. "Hence, there is no market balance yet. There are not enough transactions to see what the right price levels are at this stage," Slavchev said.
Stanimira Pashova also noted that the rental price offers to remain unchanged but no deals have been concluded under the new conditions yet. The outcome of the searches launched over the past month will become known within three to six months, indicating in what direction prices will go, she added. Questions About Supply
Five or six posters reading "Offices for rent" line along Sofia's Tsarigradsko Shose boulevard on both existing and new buildings. Such offers have not been seen for the past 10-15 years, Anton Slavchev noted.
There are also individual panic reactions. Projects that failed to find tenants at prices of 8 euro per square meter before March are now trying to do so for 7 euro.
At the same time, there are many projects under development. According to the generally available information, investors intend to complete them without changes to the deadline and the internal allocation of space. These investors have secured bank financing. The worst that could happen to them is for banks to ask for a little more deductible in the last tranches. However, a problem with the funding is emerging for new projects, with the general expectation being that many of them will not be launched.
By the end of the year, several office buildings will be on the market. It is also possible that companies having business troubles will vacate even more. Analysts expect a higher percentage of vacant space at the end of the quarter - above the current 10-11%.
Anton Slavchev predicts that companies that will try to sublet part of their office space in order to optimize their costs, will also enter the market as lessors.
The Big Unknowns
In general, the economic and health situation is decisive for the development of the office space market. "If the economy slows down, it will employ fewer people. This will lead to job vacancies and demand issues. The global slowdown may have a positive effect on Bulgaria if international companies transfer their businesses here from countries having a more unfavourable environment ", noted Anton Slavchev.
"So far, we only observe the attitude of companies towards the home office, based on an experience of two or three months. We are yet to see whether there are businesses severely affected by the crisis, whether there will be a second wave of the virus, and what restrictions it will be associated with," says Stanimira Pashova. Given the share of rent costs of about 10-20% of general costs in the IT sector, for example, a certain drop in a company's revenue is not a reason for the emergency vacation of offices, but if the business itself suffers, it becomes impossible to maintain the office, she said.
Verka Petkova considers political stability in the country and the possible tax changes to be significant factors as well.